TSP Talk Blog

Stocks chopped around for the first couple of hours of trading on Tuesday, but the bears stepped in when the price of oil started to tumble. Yields were down but that took the bank stocks down with them. The Dow lost 308-points, or -094%. Small caps and the Nasdaq lagged, although the largest tech stocks were down just 0.53% in the Nasdaq 100 index. Bonds rallied and oil sank.

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The market is getting a little finicky. First it was running up in anticipation of the vaccines being released, knowing the economy was going to likely heat up. But just as those vaccines were being administered, we got a bit of a sell the news reaction because bond yields started to take off on the anticipation of a boost in the economy.

The banks liked that but the growth stocks started to get cranky as higher yields take away from valuations.

Then yields dipped for a couple of days because of signs of COVID numbers jumping again. Growth stocks perked up, but the financial stocks didn't like that. Oil prices started to rollover and the small cap indices started to tumble as small bank and oil stocks were getting beaten down.




As the rotation out of growth and into value started to reverse again when yields dipped, the weakness in small caps was contagious and jumped into the other indices and yesterday was a bit of a washout of a market that had seen enough.

These kind of internal breadth numbers are quite lopsided and could be the sign of a short-term oversold condition and possibly some relief.




Even if we do see some short-term relief, the charts are starting to show some cracks and that means we have to be on our toes for the possibility that rallies may need to be sold. It's almost a make or break time for some indices like the small caps.


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The S&P 500 (C-fund) has been having a difficult time getting off that 20-day EMA. After a big 7-day rally earlier in the month, the index has been chopping back and forth for over a week now, but still holding onto some support. And, in the process of chopping, it looks like we could have a bull flag being created. That's good, but we saw the Nasdaq struggle for a while, and now the small caps are struggling, so will they drag the S&P down with them, or will the S&P pull the other two back toward their old highs? Yields and oil seem to be holding those cards.




The DWCPF (small caps / S-fund) was down sharply on Tuesday and closed below its 50-day EMA again. The bull are hoping that this is an inverted head and shoulders pattern, which tends to break to the upside of the neckline, which is just above 2200 right now.




However, we can look at this same chart and see that we could be looking at an uglier head and shoulders pattern, that could breakdown, although H&S patterns can also be continuation patterns so maybe it's not so bad - just something to consider. H&S patterns tend to breakdown, but more so when the chart is in a downtrend, and this one is not.




The EFA (I_Fund) was down in sympathy with the U.S. markets, and a sharp rally in the dollar didn't help either.




The HYG High Yield Bond Fund actually showed some relative strength yesterday and finally closed back above its 50-day EMA after 7 straight closes below it. It's also back above the neckline of its head an shoulders pattern. These head and shoulders patterns look like potentially scary topping formations, but that isn't always the case, so we really want to see this hold above 86.20, that neckline area, and the 50-day EMA.




BND (bonds / F-fund) had another good day as the beaten down F-fund sees some relief with those yields dipping this week.




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

Tom Crowley



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