TSP Talk Blog

Stocks started the new week with a thud and the Dow lagged posting its worst point loss of the year, falling 726. We saw losses of 1% to 2% in the various indices. If you want to look at it as the glass half full, there was some buying late in the S&P, Nasdaq, and small caps and the indices closed off their lows, but still the losses were stiff. The dollar rallied and oil lost $5 a barrel making it a red day across the board. Every S&P 500 sector was down and even gold and silver were down. Bonds were the only safe haven as they rallied while yields tanked again.

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Stocks were very due for some kind of pause, but whether we needed to see a dip, a pullback, correction, or a bear market depended on who you talked to, whether it's the bears who are always expecting the worst, the opportunists (I'm probably in that category) who are always on the lookout for a chance to buy lower (and sell higher), or the outright bulls who never think it's a bad time to buy.

The problem this year is that the dips were so narrow all year. The S&P 500 hasn't had a 5% pullback since last October, so seeing the slightest pullback, especially as hard as the small caps have come down, had me buying too quickly thinking I'd miss another chance. The question is whether it will eventually pay off, or will the bears get that correction (-10%) or bear market (-20% as some define it) before this decline is over?

What a difference a week makes. It was only a week ago that inflationary concerns were in the air and we feared an overheated economy, but with yields sluggish, we kind of knew something was off, and now the talk on Wall Street is about the economic growth possibly collapsing. Yields moved even lower yesterday on that theme, and as we have questioned for weeks now, why were yields falling if inflation was the problem? Maybe that was the correct question to ask .




The move higher in the dollar gave us a double dose of trouble as a stronger dollar tends to put pressure on prices, and on a down day for almost everything, that was certainly the case.




Internally, it was as bad as expected, and at this point those looking to call a low for this pullback may want to see a 9 or 10 to 1 ratio of declining to advancing volume, as a sign of a capitulation. It was almost 8 to 1 yesterday. With S&P 500 less than 4% off the highs, my sense is that we may not see 10 to 1 anytime soon, although it was close yesterday. Those kind of sell offs tend to come deeper into a correction, and we still don't know if this is a dip, pullback, correction, or worse.




I said all that without mentioning COVID. I'm not really embracing that as the problem again, but perhaps the psychology of the media talking about it again will end up triggering more fear?
IBM posted earnings after the bell sending the stock up over 3% after hours and that helped some of the index futures move higher after the bell.

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The S&P 500 (C-fund) went from all time highs to a test of the 50-day EMA in a matter of days; 4 to be exact. Now the question is whether the 50-day EMA, which has been doing a solid job of holding all year, is as far as this pullback wants to go. Even if it does need to go lower to complete a correction or whatever it needs to do, there is a large open gap on the chart up by 4325 that is going to get filled at some point. There was a similar gap back in May that did get filled, then it flipped back down to test the 50-day EMA a second time.




The DWCPF (S-fund) has been getting destroyed after 6 straight down days, and this isn't the first time it has happened as the drop form the February highs to the March low was quite severe as well, but it bounced back. Since then it has remained in that range. The 2080 to 2100 looks to be critical support.




The EFA / I-fund took one on the chin as the rally in the dollar, the COVID scare overseas and the bear flag all added up to a breakdown in the chart, where it is now trying to find support at that 76.50 area, which has been tested, and held, several times during the spring.




The Dow Transportation Index is in a clear downtrend. There was a bit of a positive reversal yesterday that could trigger some short-term relief, but the 200-day EMA (not shown) is down near 13,750 and that could be the eventual target here.




The BND (bonds / F-fund) were up again an whether it was because yields were looking to go down again, or because bonds were a safe alternative to stocks yesterday, I'm not sure, but the yield on the 10-year is now down below 1.2%, sending the BND up to the late January high, nearly filling that open gap from early January.




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

Tom Crowley



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