TSP Talk Blog

After Monday's largest one day gain since June to start the month, we've now seen the worst two day stretch for stocks in six months. The Dow spent most of the day in positive territory but succumbed to the selling pressure late to end the day down 121-points. Once again the broader indices saw he larger losses with the Nasdaq and small caps plummeting more than 2%. The Transports actually gained 0.66% on the day, while bonds were down as yields crept up again.

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It continues to be about a rotation from growth to into value stocks. It could last a few days, or months, you never know, and there are catalysts out there that could change it like the price of oil, which was up 2.6% yesterday, and yields, both of which are putting pressure on the growth sectors, particularly those large tech stocks that seems so invincible not long ago.

You can see that the yield on the 10-year wasn't up much, but the recent dip appears to be over.




With both bond prices (not yields) and gold continuing to fall, it doesn't seem like investors are too worried about the market since these are the areas they tend to turn to when stocks are faltering. Also, gold tends to rally when inflation heats up, and it is now at a 9-month low.

This chart of the tech heavy / growth heavy Nasdaq looks very vulnerable as it sits on the neckline of a head and shoulders pattern.




The tricky thing about head and shoulders patterns is that they tend to be continuation patterns, meaning if the market was going up before the H&S was created, it tends to break to the upside, and a head and shoulders pattern in a downtrend is very bearish. One exception is when they are large and creating a topping formation, and the chart above really looks like it could go either way based on the normal criteria.

We get the February Jobs Report on Friday and estimates are looking for a gain of 200,000 jobs, and an unemployment rate of 6.3%. There are concerns of a report that is too strong which would likely send bond yields higher, and of course stocks are not digging that trend. A weaker than expected report, or maybe one just inline with estimates may be a better bet for the stock market on Friday.

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The S&P 500 (C-fund) failed after the giant rally on Monday, and here it is down testing that 50-day EMA again. In a bull market you'd expect the 50-EMA to hold but corrections do happen and every once in a while we see something more severe. The 200-day EMA isn't even in the picture so if that wants to get tested, we would be in for a rough ride. For now, that 3800 area seems to be the line in the sand.




The DWCPF (small caps / S-fund) is in a similar situation - still basically above key support, but it wouldn't take much to change that. There are value stocks, as well as growth, in the Russell 2000 and DWCPF small caps indices so this isn't quite like the Nasdaq, but they have been behaving very similarly to each other lately.




The EFA (I-fund) was down but the dollar was too so it held up a little better than the U.S. indices yesterday.




The Dow Transportation Index was actually looking as if it was going to close at a new all-time closing high with about an hour to go yesterday. The late selling kept it below that pesky 13,700 level, and we see that flat top growing longer. This one looks ready for a rest, and if it does breakout, it could be one of those fake outs to get us all leaning the wrong way.




The BND (bonds / F-fund) was down as yields moved higher again. The move down created a new open gap near 85.60. The action here looks poor, but oversold in the short-term.




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

Tom Crowley



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