TSP Talk Blog

That was a heck of a final of hour of trading to end the third quarter. The Dow lost 547-points, and at -.1.59%, was the laggard on the day. The S&P was crawling back to break even before that final hour sell-off, and the small caps funds were positive with about an hour to go, but that too gave up the ghost. The Nasdaq lost 0.44% and held up best despite falling over 125-points in that final hour.

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Obviously the end of a quarter, and a bad month, brought out the window dressing with money managers likely dumping losers in a down month to get them off their books and their quarterly reports. The question is whether the new month, which usually brings in new money to the market, will trigger a reversal.

This is speculation but if a money manager owned a stock ABC and it had a terrible quarter, they may sell it so it doesn't show in their books as a holding. But they still might like the story of the company so they may turn a round and buy it back in early October.

Technically, the action was bad on Thursday, but so far the charts are not doing anything out of the ordinary after a pullback in that a test of the lows is common. The trouble comes when the test fails and the indices sink to lower lows. We also see the neckline of some troubling head and shoulders patterns being tested again.




Market crashes don't usually come right after the market makes new highs, but more often we see poor action for a while, and then the selling picks up, so this test of the prior lows could the low, or the start of something more sinister. It's really hanging on by a thread at this point.

There is a so much going on in the country that a crash, which is a rare event, seems possible. Meanwhile, all summer the market shrugged off most of these negatives despite knowing that we were seeing some slowing in the economy (GDP getting cut in half), debt ceiling deadlines, supply chain issues, downward earnings revisions, and a government shutdown possibility, but now that the dates are getting closer, the wall of worry may have gotten too high. If you didn't hear, the Senate did kick the can down the road again to avoid a government shutdown. But stocks sold off anyway.

October has a bad reputation because of a few major meltdowns over the years, and it can be very volatile, but it actually isn't near as bad as August and September historically.


Chart provided courtesy of www.sentimentrader.com


This chart is a little old but it goes back to the 1950's through 2011. And, in the last 20 years, October has been positive about 75% of the time despite the propensity for volatility. October is also one of the months in the "best 6 months of the year" strategy which starts in October and ends at the end of April.


Chart provided courtesy of www.sentimentrader.com

Yields and the dollar were down yesterday so there wasn't any extra pressure on the market. It seems more forced like it was going to happen no matter what, being that it was the end of the quarter.

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The S&P 500 (C-fund) is in the process of testing the September 20 lows. The difference this time was that it closed at the lows and below the 100-day EMA so that's a bit of a red flag and seeing a little more selling wouldn't be a surprise, but the bulls would gladly take that if we can get some kind of reversal like we saw on the 20th.




The DWCPF (S-fund) held up a little better than the large caps yesterday but they also closed at their lows which makes it questionable whether this is a low or if we need to see another swoosh type sell off that gets bought later in the day for a reversal. You can see below that most of the lows that touched the rising support line and 130-day (6-month) moving average, quickly bounced up off support. This one hasn't yet.




The EFA (EAFE Index / I-fund) was down and some of the late selling in the U.S. may not be accounted for here, plus the dollar was down helping a bit. The lower open gap was partially filled yesterday, meanwhile there are two large open gaps still overhead.




The BND (bonds / F-fund) was flat on the day and you can see how heavy this looks as there has been no dip buying after several days of selling. It's probably due for a relief rally, but if the selling continues instead and makes new lows, stocks could be in trouble.




The Dow Transportation Index is also testing the lows from earlier in the month, and nearing the lower end of what looks like a large flag-like formation. It could bounce off support, or as bear flags do, it could also break down. The next 800 move here is a big question mark.




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Thanks for reading. Have a great weekend!

Tom Crowley


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