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TSP Talk: Small caps in a league of their own

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Stocks were mixed again yesterday, but only because the invincible small caps refuse to fall. The Transportation Index was also up yesterday, but other than that the Dow, S&P 500, and Nasdaq were down on the day, yet internally there was a lot of strength under the surface. The Dow lost 69-points, and the S&P 500 is actually down for the week, but money seems to go somewhere everyday, as cash is being treated like the plague.

Daily TSP Funds Return

The initial jobless claims came in about 200,000 higher than estimates, and the continuous claims were also up 200K, yet stocks opened sharply higher on Thursday after that report. Why? Because of stimulus. The actual economy doesn't seem to matter. It's all forward looking regarding how much money is the Fed and the government is going to throw at the economy.

With the announcement of Joe Biden's $2 Trillion dollar economic plan, and the Fed's assurance again that rates are staying low, stocks were given a reason to rally again, but all of this free money continues to put pressure on the dollar, which raises prices in just about everything that is traded in dollars. That's inflation. The value of these items isn't any higher. It just takes more dollars to buy them because the dollar is worth less. At some point this may hurt the market but right now it's the trade. Spend, spend, spend. Kill the dollar. Prices rise.

The numbers show the internal strength yesterday despite the negative numbers in the major indices. The NYSE share volume was about 3 to 1 in favor of advancing issues, and the Nasdaq was almost 2 to 1 in favor of advancers.

It can be frustrating trying to be patient and wait for a better opportunity, but when you see a chart like this, patience is all we have. When you see extremes on both sides of the chart like we saw in 2020 and into this year, on the down side in March and in the stratosphere now, it is not a great trading environment. It's really not the best buy and hold market either because 35% to 40% draw downs are tough to swallow, and another may be on its way -- at some point.

Trend traders are benefiting now, but the downside to trend trading is that you have to wait for the trend to break before you'd sell, and the long term support is about 600-points below the current levels. That would be quite a loss to take, but holding that long is the only way to have ridden the small caps all the way up to these levels. So it's a trade off, to be sure.

Monday is MLK Jr. Day and the stock market and the TSP will be closed so the TSP will not be processing transactions that day. Any transactions made between 12 noon ET, on Friday and 12 noon on Tuesday, will be processed COB on Tuesday.

The S&P 500 (C-fund) continued to hug that old resistance line, and it continues to hold as support. This looks like a bull flag, which tend to break upward, but we just watched an F-flag, which tend to break to the downside, break to the upside. It's certainly hard to argue with the strength, but we know stocks don't go up forever without a reasonable correction here or there. It's been about 3 months since we've seen one any meaningful pullback.

I'm running out of adjectives to describe what is happening to DWCPF (small caps / S-fund). It has barely broken stride, and ironically it only did so during Christmas week when no one is usually selling.

The EFA (I-fund) had a good day as the dollar fell again, as we talked about above.

The Dow transportation Index has been doing well and made another new high yesterday, which is almost always a good sign for stocks, or at least a good sign for the economy. But we knew that because it's not so much about the individual stocks doing well, it's about the easy money being thrown at the economy. Is anyone else getting tired of hearing me say that?

BND (bonds / F-fund) were down on Thursday after Wednesday's big rally, and that's despite a weak jobless claims number which would normally send yields down and bond prices up. Again, yields rallied because of the stimulus talk, and bond prices fall when yields rally. This is still all speculation because the jobless numbers over the last couple of months are not showing much growth.

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Thanks for reading. Have a great weekend!

Tom Crowley

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The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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