TSP Talk Blog

Stocks continued to move off the lows with another big rally on Tuesday. The Dow jumped 492-points - off the highs of the day again but obviously a big gain. The Nasdaq led on the upside with a 3% gain, followed by small caps, while the S&P 500 and I-fund saw gains near 2%. Bonds were down as yields continue to bounce back from last week's decline. A lot of good action out there but the main concern now may be whether we get a test of the lows.

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Internally the numbers were very strong with many more advancing stocks and share volume than declining. The Nasdaq had a big day so Monday's 655 new 52-week lows turned into just 67 new lows yesterday.




So all that is good, but now comes the tricky part. Often the first big rally off the lows is the easy money, but once the indices jump out of their oversold conditions, it can get a little tougher to continue the move with the bears patiently wanting to sell a meaningful rally, which we have now had.

During this 2021 bull run, buying the dips and pullbacks worked every time, but even if we did run back up to new highs eventually, a retest of the prior lows is not unusual. We'll talk more about that below with an example on the S&P 500 chart.

We are getting closer to the bullish seasonality surrounding the holidays, but until we get into the 3rd week in December, the seasonality chart doesn't really favor the bulls yet.


The yield on the 10-year Treasury rallied again and topped near that 100 day average yesterday, which could be potential resistance, but that big open gap near 1.64% is going to be a tough lure to ignore.



Above is the 2-year Treasury and unlike the 10-year which has been chopping back and forth for months, the 2-year has tripled in recent months, and that sent the 2/10 year yield curve (below) down sharply. This yield curve is not inverted, which would be below 0.00 and bad news, but it has narrowed dramatically in the last few weeks. An inverted yield curve tends to forecast upcoming recessionary periods. The last inverted 2/10 curve happened in August of 2019, and of course 5 months later we were faced with COVID. How'd it know?





Bottom line: Great start to the week, but I wouldn't be too surprised to see the bears make another attempt in the coming days. I hope I'm wrong because it can be a big mistake to be wrong if you act on it, but if that happens, then the gains of the last two days could be in jeopardy. That said, the low made last week does look pretty solid and any test might easily hold.

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The S&P 500 (C-fund) had a big day, and while small caps gave up a lot of their early gains, a late push higher in the large caps pushed this index back up near its highs of the day by the close. That peak on the 22nd of November was a bell ringer, but the high volume lows earlier this month was also a meaningful sign, similar to the lows in September. But even back then we did get a test of the lows after the initial rally failed. There may be a distinction between the recent low and that one back in September. Sharp "V" bottom lows like the one on September 20 are more apt to get tested than a consolidation low where the low is carved out over several days like we saw in the first few days in December, and early October.




The DWCPF Index (S-fund) had a big day but the orange EMA may be trying to act as resistance after holding as support so often this year. The open gap below in red is a possible retracement target so I think the volatility may continue - even if the lows are in.




The EFA (I-fund) also participated in the rally and two open gaps (blue) were filled yesterday, but another big one (red) was opened. So, we can't assume that the rally will continue, because opens gaps are lurking below and wanting to get filled. The 50-day EMA is still just overhead and could pose some resistance. But if it can get above that, there would be some more room to move higher.




BND (Bonds / F-fund) was down sharply again after another push higher in yields. The moving averages are just below and may try to hold as support, but volatility brings open gaps, and there's a big one near 84.60 that we will keep looking back toward knowing they tend to get filled.




The Dow Transportation Index has had a big run off the lows recently but yesterday it backed off after another early rally as it seems to need to do some consolidating of the recent 1000 point rally since December 1.

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

Tom Crowley

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