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TSP Talk: A washout sell off / reversal

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The pullback in stocks continued on Tuesday, but a Turnaround Tuesday it was. After the opening bell was met with severe selling, we saw some buyers step up fairly quickly, and from there we got a steady move higher until about 10 minutes before the close when we did see some selling before the bell rang. The Dow and S&P 500 ended the day slightly higher - a huge reversal, while the Nasdaq and small caps continue to go their own way, and yesterday that was down.

Daily TSP Funds Return

The Fed chairman Powell told the market what it wanted to hear yesterday regarding interest rates, inflation, the vaccine, etc., and that helped fuel some of that positive reversal in stocks.

Bond yields moved higher in early trading, as did the price of oil, but as they came off their highs, and eventually moved into negative territory, stocks reversed off their lows to closer near their highs of the day.

Based on the recent action, it looks like we could see new highs again in the major indices some time soon, but something feels a little different than what we experienced since the end of October when this current rally started. Enjoy any new highs, but don't get too comfortable. The market is being pushed around by algorithms that are trying to stay on top of whatever is the market catalyst of the day, and it could all change on a dime.

It's no coincidence that stocks pulled back just as the recent surge in bitcoin stalled and corrected sharply over the last couple of days. Many companies have been buying into bitcoin and now their share prices takes that position into consideration when valuing the company. Tesla recently bought $1.5 billion worth, and Square just announced a $170 million purchase. There's a lot more as well including financial institutions who want in on the transaction processing.

We've seen these marriages before with the stock indices and other catalysts like the price of oil, the number of COVID case counts, election polls, bond yields, stimulus negotiations, etc. The algorithms focus on something in the short term and the trading follows it.

So, even if you have no interest in bitcoin, right now it's something the market cares about, so you may want to watch the price and charts on a regular basis.

The S&P 500 (C-fund) narrowly escaped a 6th straight down day after recovering from deep early loss on Tuesday morning, and closing just slightly positive. This looks like a very promising reversal, but it may have been better if the S&P actually hit that purple 50-day EMA line on the way down so we don't have to wonder if it will come back to care of that in a few days. The bottom of the rising trading channel was tested, and held. It also managed to close above the 20-day EMA after falling precipitously below it in early trading.

The DWCPF (small caps / S-fund) also tested its rising support line and held and reversed higher to close above its 20-day EMA again, but it did lose 0.64% on the day. Sometimes the large cap stocks get more attention on reversal days, and small caps follow in the following days. We'll see.

The EFA (I-fund) closed higher and that looks like a nice looking bull flag on this chart, which did not pull back as severely as the U.S. index charts. It also closed above the January highs again, which is meaningful.

The Dow Transportation Index not only closed in positive territory, but it was a new record high close. Not quite a positive "outside" reversal day, but a positive reversal day none the less.

The BND (bonds / F-fund) were down slightly but reversed off the lows. Bonds are quite oversold and yesterday we mentioned 85.80 as a possible downside target and that looks like where it found support. We could see another bear flag consolidation for a few days.

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

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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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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