TSP Talk Blog

Stocks were up modestly on a quiet Monday on Wall Street. Yeah, right. What a day! The Dow traded in a 1300 point range and closed with a 99-point gain on very high volume. Most of the other 1200 points were on the downside as we had a powerful positive reversal day. Small caps, which had been beaten up the most, recovered the most and tacked on a big gain. The I-fund lagged as we might expect with the dollar down and the U.S. indices rallying late. Bonds were down.

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I don't know exactly what happened in the bowels of the morning trading, but the theory I presented yesterday about mom and pop panic selling after reading and watching their weekend news regarding the recent sell off in the stock market, certainly looked like it was happening, and of course they tend to sell at the exact wrong time because after lunch on the east coast, the buying off the lows began, and it was furious.

Been there, done that, and calling for a relief rally in that situation wasn't that tough. But calling what comes next can be.

If we go back to the 2020 Covid crash and get reminded that big reversals and rallies don't always hold in a bearish environment. Back then we barely got more than a one day bounce. Only the initial snap back rally lasted more than a day.




It could be the 200-day average that makes the difference. When below, expect a more bearish outcome. So far the S&P 500 hasn't closed meaningfully below the 200 day average for more than a day (it closed less than 2-points below it on Friday) and yesterday's reversal pushed it back above the average.

The Covid crash was certainly an extreme event with stocks going straight down for a month, and then straight back up afterward, confusing even the most experienced traders. We don't have a Covid calamity right now (that I know of) so maybe this one will be more orderly and orthodox.

Going back to pre-Covid days of 2018 and 2019 we had several tests of the 200-day EMA that held impressively, with most surviving a brief break below it and a quick reversal like we saw yesterday. There was an exception at the end of 2018, and yes, perhaps now with the Fed on the verge of raising interest rates and ending their bond buying program it will be more like that situation. At least back then - late 2018, the rallies lasted more than a day or two. Like I said; it's a tough call.




There is nothing too concerning for the stock market right now. It's not like we haven't seen interest rate hikes before. They can be a hindrance and a drag on the economy and the market, but it's not a reason to crash. Now if something else in the headlines pops up to make this all make sense, then it's a different story. For those who have been regular readers here you have this one before - back in 2001, the Dow lost 10% during the week BEFORE September 11. Why? Did influential people know and act beforehand? I don't know. But the news followed the market, and that's always a possibility.

There is a two-day FOMC meeting this week that starts today, and tomorrow we'll get the fed's decision on interest rates. Obviously this is huge for stocks, and you may want to decide this morning if you want to be in stocks or not tomorrow at 2 PM ET when that policy statement is released.

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The S&P 500 (C-fund) was up slightly after a wild ride on Monday. A 195-point range and closing at the highs is quite a reversal, and the high volume suggests capitulation from those who did some panic - get me out at any price - selling in the morning. A kangaroo tail reversal like we see here is normally a good indication of a low, but it's not out of the question that we could see a test of those lows down the road. The old dead cat bounce theory is in play, and that was quite a fall this market took. It's not always easy to get up and walk away without some cuts and bruises that may lead to a limp going forward. It looks good, but stay on your toes in the coming days. The Fed decision tomorrow could help or hurt.




The DWCPF (small caps / S-fund), which has been brutally beaten down recently, got most of the attention yesterday as it and the Russell 2000 small caps index both closed with strong gain, leading the large caps by a long shot. Again, it was quite a drop and all may not be perfectly well just yet.



Is the open gap below 1800 in play? Maybe not right away, but when they are there we know it's a possibility.


The EFA (I-fund) closed at its highs after a big reversal, but you know the deal with those overseas markets when our market rallies late. The intraday low broke support but it closed above the bottom of that large trading channel.




BND (Bonds / F-fund) was down slightly and we can see it floundering below the moving averages and the bottom of that channel, so it's not looking great technically. We could see the occasional oversold bounce or flight to safety from investors, but the F-fund is not my fund of choice these days.

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Thanks for reading. Hope to see you back here tomorrow.

Tom Crowley

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