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TSP Talk: Can the bears keep control?

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There was a nice little rally toward the end of the day on Friday but once again the bears had their way putting another dent in the stock market. By the close the Dow had only lost 60-points but the broader indices, particularly the small caps, were beaten down hard. Bonds rallied as yields slipped after the disappointing jobs report. The unemployment rate fell to 4.2%, which was a positive surprise, but the 210,000 jobs created in November was well off the 573,000 that was expected.

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Despite the projected 9.7% estimate for the fourth quarter GDP, which is phenomenal growth, we continue to see bond yields slip, something that is not characteristic of a strong economy. It could be a flight to safety as investors opt for bonds over stocks during this current pullback / correction, but the breakdown in yields on Friday was a little alarming. On Friday I said that we were more likely to see 1.7% before 1.3%, and the bond market quickly tried to prove me wrong as the yield on the 10-year Treasury fell to 1.34%.

Last Monday stocks were up big early but flopped over hard by the close, so the open may not mean all that much this morning. The technical picture is deteriorating but stocks are oversold and we are in a situation where we are probably just as likely to see a big bounce in stocks as get a market crash - it's getting that touchy out there. The indices are oversold and we tend to get a bounce under these conditions, but I saw a headline over the weekend that Evergrande, that Chinese real estate company that is having severe debt issues, sent out letters on Friday to investors saying they cannot pay on the bonds. This could trigger even more selling, or it could have already been priced in with the recent correction. There's also the trouble at the Russia / Ukrainian border, a sell off in crypto currencies, the Omicron situation, and the debt ceiling that could be hit by the 15th if nothing is done. Whichever way these resolve themselves, expect volatility to continue and confuse market timers.

Small caps have really been hit hard, both the Russell 2000 and the S-fund's DWCPF Index. Almost every line in the sand that was drawn has been taken out on the DWCPF. This is a little Monday morning quarterbacking, but here's a day by day look at that index, showing how every attempt at support has been broken...

On the day before Thanksgiving there was a big rally after the orange moving average, which has held all year, seems to hold again, and we were heading into the day after Thanksgiving, a day that has one of the most bullish record of the year.

Instead of rallying, that half day of trading was a disaster and the indices plummeted through the moving average, but it closed well off the lows and it looked like a positive reversal day was created - maybe the low was in?

The next Monday stocks were up big -- until we got word of the Omicron variant in South Africa, and all of the early gains were gone, but once again that moving average was trying to hold on a closing basis so again, maybe the low was in?

Nope. Tuesday was another disaster as the S-fund lost another 2.4% on the day, but once again it held at another key average, the 200-day EMA, so surely the selling was over, right?

Hardly. Wednesday gave the S-find another beating and this time it was nearly 3%, and it closed at the lows of the day with little support below it. Not good, but the index was very oversold.

Thursday we did get a nice relief rally of 2.5%, but notice that it only made it up to that blue 200-day average again, as the old broken support was now potential resistance.

And of course on Friday the selling resumed but this time the lows hit a moving average that I rarely even look for, which is the 280-day average, or basically the daily one full year average. It closed off the lows, although not by a whole lot, but this really needs to hold because there is a lot of open air below that green moving average.

So the stock market is in some trouble. The question is whether there is an end of year rally hiding behind the poor action and the bad news. Stocks don't usually go straight down, even in the worst of bear markets, but it has been virtually straight down since November 16 for those small caps, when a relief rally failed.

The small caps and the I-fund have been taking the brunt of the sell off, while the S&P 500 has held up a little better with the help of the large tech stocks, but those stocks started to waver late last week so that is concerning.

Bottom line, stocks are due for some relief, but stock market crashes, which are very rare, tend to manifest after the market has already seen deteriorating conditions as we have been seeing. If you know if the next relief rally is going to be the start of the end of year rally, or if it needs to be sold, you are smarter than I am. It is a really tough call with everything going on around the world right now. I know what I'm expecting, but I don't think any of us have a lot of confidence in any call right now.

The S&P 500 (C-fund) has been in a downtrend since the nasty negative reversal day on November 22. There was a high volume sell off on November 30th last week that didn't quite mark the lows of this pullback, but often when you see something like that it is not only an indication that the bears are tagging the stops, but also exhausting the selling pressure, and we usually see some kind of rebound. We actually did get a big rally on the 2nd, but that failed. So far the general area between 4500 and 4600 is holding but it remains in a tentative technical position below the 50-day average, and that needs to improve, and my guess is that the 4 billion share day last week could mean the worst is over for this leg down. Yes, we could get a headline driven sell off, but I think buyers won't be too far off if that happens. Not that this will necessarily be "the" low, but rather some kind of buyable low - however long it lasts.

The weekly chart of the S&P 500 shows some support near last week's low. Again, some kind of news driven event could push it lower, but I'd expect buyers to push it back above that support. I just don't have a feel if any relief rally will hold for just a short time, or into the end of the year. We're still in a bull market and moves like this have been buying opportunities, but like the COVID crash reminds us, things can get worse despite the technical support so there's no guarantees, of course.

The EFA (I-fund) has been consolidating under the 200-day EMA for 6 days now. The open gap above suggests a possible move higher, but this isn't acting well, and the dollar may have to ease lower before we get a decent rally here.

The Dow Transportation Index has held up the last couple of days as it did not sell off on Friday with the rest of the market, so that's a good sign. There is an open gap down below that may get filled at some point, but there is also one overhead.

BND (Bonds / F-fund) rallied strongly on the weaker than expected jobs report and the unexpected bullish move for bonds continues. It is in a large channel still and closer to the top with a big open gap down near 84.60. So, either it breaks out, which I think is the least expected action - so maybe we should expect it? Or the chart plays out the way it suggests and pulls back to fill that open gap and test the lower end of the channel again.

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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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