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TSP Talk: A big early snap back rally gets thwarted

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December started with a bang as stocks rallied out of the gate and it looked like one of those classic new month / new direction moves. Fast forward a few hours and it was back to darkness. The Dow lost another 461-points after being up over 500 in earlier trading. Bonds were up slightly after an early sell off (yields down), and the dollar moved higher.

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The Fed spoke again yesterday, reiterating his more hawkish stance on inflation, but the early rally barely blinked. It wasn't until it was reported that someone in the U.S. tested positive for the Omicron variant after flying in from S. Africa. The market is in a state of high emotions right now, and emotional money tends to panic - whether the move is up or down, but it also tends to come closer to the end of a move, than the start or the middle.

There's no agreement on the debt ceiling in D.C. yet. There's also the story that the Ukrainian prime minister believes an imminent coup attempt by Russia will take place this week. There's a lot going on and the market seems to be taking it all in.

Can stocks continue lower? Absolutely, but Wednesday morning's big rally reminded us how quickly it can go up when it does reverse, and once we have another snap back rally, the underinvested will panic on the other side and start buying back in.

From there, you never know. That's where we decide if we think we're in a "sell the rally" market or if the lows are in for now and we get a rally into the end of the year.

The selling does seem overdone in the short term, but the market always seems to go a little further than we expect, and that's where panic sets in.

I'm sure I'm not alone in thinking that we are often the star of our own Truman Shows, when everything you expect to happen, goes the other way, and everyone is watching you and enjoying the show. And even when things go your way, like they did yesterday morning, they pull the rug out from under you, just to get your reaction and shoot their ratings up because I'm sure our reaction would be ratings gold. Once in a while I check for hidden cameras in my office, just in case it's true.

The Russell 2000 is down over 12% from its high from less than a month ago, and it has now been down 9 of the last 10 days. At this point we either crash, or we get a relief rally. I doubt there's much in between with emotions so high. Heavy trading volume usually comes near the end of a move, but the fact that we've seen three days of extreme volume makes you wonder, but typically it means anyone who was thinking of selling, has already been doing so.

A one year chart of the DWCPF / S-fund shows us how big this recent move has been. It is just about the size of the decline in February. Don't remember that one? Hopefully this one will also be a distant memory before long.

With inflation in the air and the economy growing, this recent decline in oil is suspicious. It's not like we're paying less at the pump yet, but we should see be seeing some relief soon since the price of oil is down 24% in the last month. It's at some key support now after falling below the 200-day average recently.

So, we got the "new month, new direction" early on yesterday, but of course that changed in a hurry. It doesn't always happen on the 1st, but this one almost did. The question is, does one case of a flu, or even common cold like symptoms tank this market further down than it has already gone, or is there more to it than that? Perhaps it is more about fear of what the government may do with this new variant that has people are worried about, such as more lockdowns, vaccine passports, etc., which could hurt the economy again. Or is it just a combination with one more straw on the camel's back after the inflation scare, acceleration of the bond buying tapering, and likely interest rate hikes?

I can understand why the market doesn't like any of that, but if I hadn't made the mistake of buying before the typical Thanksgiving rally that didn't pan out, I would certainly be trying to buy here. But I will also be considering selling any major relief rally until the market can prove that this is just another pullback and not the end of the bull market. My indicators haven't gotten to that point yet, but when the market goes down this quickly, those indicators can change quickly. They are low enough now to the point where we usually see a low, or the bull market ends. It's getting close.

What I'm looking for now is the opposite of what we saw yesterday. That is, a "pukey" type sell off early, followed by a big late positive reversal. No sign of that yet, but it shouldn't be too much longer.

How about some good news? On December 1, the GDPNow model estimate for real GDP growth in the fourth quarter of 2021 is 9.7 percent, up from 8.6 percent on November 24.

The S&P 500 (C-fund) got another high volume sell off. Interestingly, some of the high volume was likely from buyers in the morning, and it may have been the same people selling in the afternoon. But Tuesday's volume was higher than yesterday's so it seems like the washout is done, or almost done at this point. Not that it can't go lower, but barring any major news meltdown, in the short-term we should see some relief.

It seems like every time that we get a correction, it feels like the downside has gone too far... and then it goes a little further. That's how it feels now for the small caps of the DWCPF (S-fund).

The EFA (I-fund) actually held above Tuesday's low, but then again the overseas market were closed by the time yesterday's rally started to falter, so there may be some catching up to do here today.

BND (Bonds / F-fund) was up after some morning selling as investors jumped to safety. Except for maybe some expectations of the Omicron tanking the economy again, with GDP estimates for the 4th quarter now near 10%, not many expect yields to move down, so I still think rallies in bonds need to be sold.

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

Tom Crowley

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