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TSP Talk: A bounceback but there is still work to be done

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Stocks battled back from from Friday's decline to post some strong gains on Monday, but in comparison to Friday, it has not yet determined much of anything. The Dow gained 237-points after some late selling took the indices off their best levels of the day. The small caps of the Russell 2000 actually gave up all of their morning gains to close negative, although the S-fund managed a minor gain - both unimpressive. Bonds were mostly flat after opening lower, and the dollar dipped slightly.

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The action was OK, although suspect, but it had to start somewhere after Friday's blindside sell off. Drops like we saw last Friday are not usually one day wonders, but the market isn't immune to doing something that is unusual - just like it was unusual to see a 2% decline on the Friday after Thanksgiving, which was unheard of.

One good sign yesterday was big rally in bitcoin and other speculative cryptos. It could be a sign of "risk on" from traders in general, after the recent sharp decline off the highs. The chart however, is hitting some resistance after the three day bounce after Friday's selling. A break to the upside may give the stock market a more bullish sentiment since the small caps and bitcoin peaked on the same day earlier in the month. Reminder that bitcoin trades 7 days a week so it was trading all weekend.

Trying to pick a bottom of a pullback is never easy. Perhaps Friday's anomalous selling was the low. Perhaps we revisit the lows in the coming days as a typical retest. But there are some key support levels continuing to hold, that must hold, or this will be something that we haven't seen all year. It could be a cleansing out before the end of year rally. Whatever it is, it probably won't go exactly the way that we draw it up in our minds.

Internally, the numbers weren't as good as the indices may have us believe, and the Russell 2000 giving up its gains had something to do with that. We are still seeing a high number of new 52-week lows, and the share volume was mostly flat on both the NYSE and the Nasdaq despite the big gains in the indices.

The yield on the 10-year Treasury Yield bounced back a little as the large open gap looms above. A double top pullback is nothing too alarming yet, but that large gap down was as it can often signal a change in character. Of course that change came on a day when most people weren't paying attention so I don't know how much weight to put on the move.

The dollar also moved up slightly toward its open gap from Friday. That's typical action, but the rising trading channel was broken and that could mean a change has started. Not that that would be a bad thing since a strong dollar can get in the way of rising prices.

I normally talk more about the High Yield Corporate Bonds in our Plus Reports but I did think yesterday's rally to push the HYG back above the 200-day average was meaningful and a good sign - if it can hold obviously. It had been lagging and stocks eventually followed it down, as we had been worried about. So if it can reverse back up...

Government funding expires on Friday, December 3 and that means that Congress will have to pass a continuing resolution before then to keep the government funded. They had kicked the can down the road, and we are about to catch up to that can again so there's some roadblocks ahead.

Is it possible that Friday's sell off had more to do with that deadline coming than the new COVID variant? Maybe, because the reaction seemed a little out of whack in comparison to what seemed like innocuous information that we had initially gotten on Omicron.

The S&P 500 (C-fund) rallied sharply and although it isn't obvious, a gap was filled near yesterday's high. It's one of those stealth gaps where the space between Wednesday's close and Friday's high left a pocket of air, so it wasn't a big surprise to see some selling in that area, where the S&P 500 peaked yesterday. But that is done and now we get to see who is in charge after yesterday modest rebound. It wouldn't be unusual to see a test of Thursday's lows, but that holiday trade could have been overdone because of the lack of traders and the uncertainty of the news of the day, so it was sell first, ask question later kind of day. A few days later and we kind of see that the Omicron isn't quite the pandemic that was advertised on Friday to be.

The DWCPF (S-fund) rallied big early on Monday - also filling the stealth gap before flipping over. This is bearish action, but not unusual after a drop like on Friday, and dancing around that moving average for a few days is something that we have seen before.

The EFA (I-fund) bounced off of Friday's low but closed below the 200-day EMA for a second straight day. That is a change from what we've seen this year and the strength in the dollar is making this the lagging fund. That could change if the dollar pulls back and we did see a possible breakdown in the UUP chart recently so... maybe. That open gap (red) should get filled at some point, and those blue boxes show that all of the downside gaps on this chart have now been filled -- just as we anticipate and hope that they eventually do.

BND (Bonds / F-fund) was flat on the day but it battled back from some early weakness. The chart hasn't changed much technically as the moving averages continue to hold as resistance and the head and shoulders pattern is still intact.

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

Tom Crowley

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