TSP Talk Blog

Stocks bounced back last week, after the prior week's selling, but on Friday we saw another weirdly mixed day with a 179-point loss in the Dow, a modest loss in the S&P 500, yet the Nasdaq, and particularly the small caps, were up. The Russell 2000 small caps index was actually up 1.3%, so once again investors may be selling in one area, but they're buying elsewhere.

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That may be because of what I have been talking a lot about recently, and that is that the Fed is just dumping money into the system, and because of that, I suppose we really can't look at this market like any other market.




Poor market indicators? Doesn't matter? Overvaluations? Doesn't matter? Extremes from the dumb money in various put / call and other sentiment type of indicators? No problem? The Fed is making it tough to sell anything, because not only is there money floating around everywhere and Wall Street is taking advantage as usual, but they are also pushing the dollar lower, and that will generally send prices of anything trading in dollars higher.

So why should anyone be selling? That's a pretty good question, and I admit that my denial of this has kept me from being in on a lot of the market rally over the last 9 or 10 months, since I am using my old normal analysis, and this easy money market environment may cause me to rethink normal.

I suppose that is until something comes along to disrupt the party, but can we count on that happening? A continued crash in the dollar should eventual kick the market in the teeth, but that would eventually cause hyper-inflation and send prices even higher. We may not be better off, but prices will be higher in things like food, commodities (like oil and gas), travel, etc. But what's the problem? We also have government stimulus. It's probably not likely, but some in congress are proposing sending $2000 checks each month as stimulus. It sounds great, and it would likely ignite the economy, but it could also disrupt the normal supply and demand flow, and again send prices higher. And when prices go higher, the Fed could start talking about interest rate hikes, or at least taking them off of 0%. We're already seeing that in the bond market, but the question will be, how would the market react to higher rates? They don't even have to go up. The Fed would just have to mention it as a possibility.

There are a couple of key sectors that pulled back last week, and that was the financial and the energy sectors. Both had been doing very well for weeks, but now they are testing some important support areas, so early this week, whether these break down or bounce, could be a good tell for the broader stock market indices.




This week will be a busy on with an FOMC meeting on Tuesday and Wednesday, and earnings from some big names like Apple, Microsoft, and American Express.

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The S&P 500 (C-fund) dipped on Friday coming just off last week's all-time high and the top of that long trading channel, which may be getting too long at this point, but I said that when the month started as well. Momentum can be a tough force to stop, but stop it will - some day.




The weekly chart shows the insane angle of incline since the March lows, and looking at almost every timeframe, this is at the extreme on the upside. It looks to me like a 200 point decline to around 3640 would be the least meaningful pullback that we can expect, but that momentum has to stop first.




The DWCPF (small caps / S-fund) was up on Friday, bucking the weakness in the larger indices. This index is trading right in the middle of that long rising trading channel. The blue dashed line broke down a while back but that lower support lines is riding next to that 20-day EMA which could be a double dose of support on any pullback.




The EFA (I-fund) was down and the dollar was up, and that's how this has been working lately.




The Dow Transportation Index was down again after Thursday sharp loss, and fell below the prior highs for a mini-breakdown, but there is a still a bull flag forming, and those do tend to eventually break to the upside.




The Volatility Index rebounded but settled closer to the lows of the day and it is now hugging that rising support line near 22. 22 is not a small number for the VIX so investors are still anticipating more volatility than in a typical strong bull market.




BND (bonds / F-fund) was up on Friday and you can see it consolidating after the sharp sell off a couple of weeks ago. There are still open gaps above and below the current levels and either one is equally capable of being filled in the coming weeks.




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Tom Crowley



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