TSP Talk Blog

There seems to be a lot of indecisiveness in the market recently with strong opens turning into weak closes, and weak openings turning into strong closes, while some indices do well, and others poorly, and it may be a change in character going on with higher oil prices and steepening yield curves. The Dow was flat on Friday, the S&P slipped late to close down on the day, and small caps reversed and rally big after a few days of selling.

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This market is in a speculation phase, probably unlike anything we've seen since the dot com bubble days. Perhaps we're not at that same 1999-2000 level, but you can see something is different on Wall Street with bitcoin, the short squeeze craziness in Gamestop, the doubling, quadrupling, or even 10 bagger moves in stocks like Tesla, Peloton or the cannabis stocks.

This can go on longer than we think it should, but the circumstances with the jump in the Fed money supply, the 0% interest rates, and the government stimulus has us wonder if it this is going to go on until they start pulling the plug on this easy money. There was a time, in my lifetime, when bank CD's were paying double digit interest of 10% to 15% and that was a serious alternative to taking risks in the stock market. If you were guaranteed 15% a year for 5 years in the bank, would you be dumping all of your money in stocks? But we're getting less than 1% these days, and that's why the money pours into brokerage accounts.

There's a lot more to it than that, but that's the constant battle on Wall Street, and now that bond yields are showing a little more life, not only does that mean people could chase some yield instead of stocks, but it also changes the outlook of some market sectors. The steepening 2/10 year yield curve gets money managers thinking a little differently.

Financial stocks, which had been in the dog house for a very long time, are starting to look more attractive with the rise in yields. You can see the XLF financial ETF has been performing quite well since 10-year yield started to pop higher.




Oil and yield seem to run together so with the recent surge in oil prices, companies that depend on oil, as far as costs for delivery, etc, can suffer when the price gets too high. It's not a straight correlation but you can see that small caps (IWM) started to falter once oil hit about $58. On Friday the price of oil dropped 2%, and small caps bounced back 2% after each had started to reverse course on Thursday.



So this seems to be the market environment today. Investors are chasing the changes. Yields go up, oil goes up, small caps and more growth related companies come down, and financial stocks go up. This means our TSP fund allocation, which is very limited, might matter more.

There was time when bull markets sent all 3 stock funds higher, and bear markets sent all the funds lower, but right now it's a back and forth. That's makes it tough for us with our two IFTs, and perhaps a more mixed allocation is the better approach until something changes again and we have more direction.

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The S&P 500 (C-fund) followed through on Thursday's positive reversal day to open up on the plus side, but as the day wore on the bears were doing some pushing and the index closed in the red for a 4th straight day. The index is still extended as far as how far it is above its 200-day EMA (currently 3486), and the distance that it is above the bottom of the rising trading channel. But that 20-day EMA has been holding stubbornly firm during this leg up since the election. Perhaps we'll see another push down to that 20-day EMA since it never did touch it last week, but we do see buyers stepping up each time it does.




The action is good on the weekly chart, but no matter how you slice it, is still showing extremes above many resistance lines. Technically, any move down to 3800, 3700, 3400, or even 3250, would keep the chart in a bullish uptrend, but there would obviously be some damage done. It could be a healthy move for the longer-term, and that would be some nice trading opportunities if we see that.




The DWCPF (small caps / S-fund) also challenged that 20-day EMA during last week's pullback, and the rebound on Friday indicates that it may be time for another move to new highs. Eventually this amazing run will end, but so far there's no sign as minor each dip continues to be bought.




The Dow Transportation Index made a new all time high on Friday after last week's feeble attempt by the bears to sell it off. The double top did its job of pausing the upside action, but they can be temporary roadblocks as we talked about last week. Now the bulls would prefer to see that old resistance line act as support on any pullback.




The EFA (I-fund) was up and the dollar was down sharply, which is music to the I-fund's ears. The dollar did break below its head and shoulders pattern and a test of the early January lows on UUP looks very possible.




The BND (bonds / F-fund) had another leg down on Friday and despite the open gaps being there to be filled eventually on the upside, the 200-day EMA was enough of a barrier to swat it back down before it had a chance to do so.




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

Tom Crowley


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