TSP Talk Blog

Last week ended with some selling in most of the major indices in what may have been a pre-holiday reversal. On Friday the Dow lost 177-points, and we saw losses in the S&P 500, Nasdaq, the Transports, and the small caps, but for the week it was mixed as the small caps held onto a moderate gain while most of the other stock market indices were down. Bonds were up on Friday, and for the week.

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We know stocks don't go straight up so in the long run the occasional down week is not a bad thing and helps create bases for the bullish case to build on.



But the indices have come such a long, long way from the March lows, and with just a couple of modest pullbacks in the fall, the market could be due for something like that again. Of course the more people there are that expect a pullback, the less likely it seems to happen.

The S&P 500 pulled back in September, and again in October and each time it was getting extended over that 200-day EMA to about where we are now, which is approximately 400-points above the average. There's no rules that say it has to pull back, but history suggests it's a fair possibility at this extreme




This week is inauguration week and there are some concerns out there, similar to the concerns just before the election when many knew a winner may not be called right away. But instead of stocks pulling back during that uncertain period after the election, they basically went straight up in November, and the nerves actually came in the weeks leading up to the election. From a psychological standpoint, in October they were selling the rumor, and then bought the news.

Here we are two and half months later and stocks have gone virtually straight up since the election, as we head into the inauguration. So perhaps we have a case where people did not want to sell into the rumor of a heavy military presence needed at this year's event - and by "rumor" I don't mean the military won't be there, but the rather concerns about why they will be there.

There could be no incidents at all but because stocks rallied for two and a half months leading up to this week, perhaps we should be planning for a "sell the news" reaction, because it works both ways.

"Buy the rumor, sell the news" has been a viable stock market reaction for years and years, as is "sell the rumor, buy the news." Yes, we did see a some slipping in the indices late last week, but with most of them still being near all time highs and not having a meaningful dip since October, perhaps it's time for one of those "sell the news" reactions to the last 2+ months of buying the news?

With earnings season starting to get heated up this week, it could be another opportunity for investors to "sell the news" as stocks have been ripping higher on the rumors of big growth this year. The January seasonality chart shows that there is a meaningful pattern to that sell the news reaction to the release of earnings in January (generally 4th quarter numbers for most companies.)


Chart provided courtesy of www.sentimentrader.com

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The S&P 500 (C-fund) pulled back for a couple of days to end the week last week, perhaps a pre-holiday reversal from the upside trend. Friday's decline found support at the 20-day EMA, which has done a great job of holding in recent months. Anticipating a breakdown is tough, but once there is a break in support the exits may get a little crowded, and that's why stocks tend to go down faster than they go up. So the bulls may be be able to stay patient, but don't get stubborn. The rally is going to end at some point and it probably won't be a slow drip down when it happens.




The weekly chart of the S&P 500 shows the extremes we've been through over the last year, but the slow and steady grind higher of the longer term bull market with in the blue channel below, has been a place where the S&P 500 tends to gravitate towards eventually.




The DWCPF (S-fund / small caps) was down over 1% on Friday, but that wasn't enough to erase the big week they were having prior to that pullback. The chart continues to trend higher. As I said, it's tough to call when that trend will end, but if you see some support starting to crack, you may not want to be the last person out the door.




The EFA (I-fund) broke below its rising channel on Friday. It did have a similar breakdown in December, which was quickly remedied. It's always possible that the trading channel is just widening, and in that case there may some potential support in the 73.50 - 74.00 area.




The Dow Transportation Index had a rough day on Friday but the old high from December has so far held as support after a brief dip below.




BND (bonds / F-fund) was up on Friday with the F-fund gaining 0.13%. Last week we saw a successful test of the November lows, followed by a modest rally higher, but so far there's been no move up to try to fill that open gap. You can see that the 50-day EMA (purple) has been holding rather well, regardless of which side of it BND is trading on.




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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley



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