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TSP Talk: Lower lows testing key support

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Stocks resumed the selling that started last week, and in the case off small caps, resumed a 3-week decline from the highs. The Dow gave up another 652-points on Tuesday, and we didn't get much of an attempt from the bulls to buy the dips. That may have been because the Fed was speaking and they didn't like what they heard. Bonds were up (yields down) and the dollar was down sharply as investors sense some potential Fed interference on growth with rate hikes on the table, and expediting their tapering of the bond buying program.

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Whenever you get a sell off like we had last Friday - that half day of holiday trading, you have to make some decisions. Do you get scared out and sell believing there will be futures declines down the road, or do you buy it up thinking you are getting a bargain?

There is no right answer since some pullbacks are very minor (3% - 5%), some or more meaningful (up to 10%), and anything over 10% is a major correction. But knowing which we'll get is tough to guess and using the charts in indicators tries to give you some clues.

We saw some initial support levels get tested during Friday's sell off, and then we got a bounce back on Monday, although the fact that the indices closed off the highs on Monday suggested that the bears may not have been done yet. There was no Turnaround Tuesday and instead we saw that first level of support give out on some charts, they next level down.

A quick look at some charts shows these support levels, some holding, some failing, and some failing at the first, but holding at the next. These are the S&P 500, the DWCPF (S-fund), and the Russell 2000.

While the Fed has been minimizing the threat of inflation by continuously using the term "transitory", meaning it is just a temporary blip caused by the government stimulus and easy money from the Fed over the last year or so, yesterday they changed that tune by suggesting we should retire the word transitory and perhaps anticipate a longer lasting dose of inflation. They also said they may taper their bond buying a few months earlier than anticipated. That's not what the market wanted to hear.

A change in the Fed's outlook and policy is a big thing and perhaps some money managers are making some major adjustments before the announcement of any interest hikes comes, but history suggests that bull market can stay intact until we get a third rate hike - if you believe history is a good judge of the future.

The yield on the 10-year Treasury Yield tanked for a second straight day, and that is not what we'd expect when the Fed is talking about higher inflation, but raising interest rates, in addition to the Omicron scare, would be economic roadblocks, and that's why yields fell.

The dollar also tanked and we saw the I-fund hold up better yesterday for a change, after it had been beaten down badly by the recent rally in the dollar.

Internally the numbers were bad enough to expect some kind of snap back rally. That doesn't mean the down side is done necessarily, but you may want to have you plan in place in case we get one of those giant rallies. It could be the low, or it could be an opportunity to sell if you own stocks.

Now it's a new month, and often a new month brings a new direction. If this is a technical pullback, which was needed, then that may be the case, but the situation with the Fed, interest rates, inflation, tapering, and maybe the Omicron may prove otherwise.

Seasonally, history suggests any obstacles would more like occur in the first half of December, and the second half of the month is historically strong. The red line on the 24th is due to the 2% decline on Christmas Eve in 2018.

Chart provided courtesy of

Bottom line; stocks are not acting well, but whether that continues or if the pullback is complete is a tough call. Trying to catch a falling knife can leave a mark, and I have been finding that out. Of course snap back rallies can be explosive so the risk is sometimes worth the reward if you're right. Sometimes you have to guess, but the safer way to play it is to wait for the smoke to clear when the risk / reward ratio is not as extreme. It's a personal choice.

It wasn't long ago that I was commenting on how far above the 50 and 200 day EMA the S&P 500 (C-fund) was. It didn't take long because here it is testing the 50-day EMA. We are seeing the Russell 2000 testing its 200-day EMA now, and if there's any move toward the 200-day EMA on this chart, there's going to be a lot of carnage because you still can barely see the average (green line) which is down by 4386. There are a lot of open gaps between the current level and that average so it is certainly a possibility, but at the moment, yesterday's low is testing one of the rising support line (blue line.)

The DWCPF (S-fund) took another beating and small caps in general have given up a big part of their 2021 gains in the last three weeks. It fell through some longer-term support yesterday but it is trying to find support at the 200-day EMA.

The EFA (I-fund) was down, but not as much as the U.S. indices and the 0.46% drop in the dollar helped. It closed above the October low after briefly falling below it. It has closed below the 200-day for three straight days, which is not a good thing, but the lure of the big open gap above it could be calling for at least a short-term rebound.

BND (Bonds / F-fund) broke above resistance and the shoulder of that head and shoulders pattern. There's a wide range between 84.40 and 85.80 as the bond market figures out if it wants to react to inflation, or the potential interest rate hikes from the Fed.

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

Tom Crowley

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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