TSP Talk Blog

More crooked number losses on Thursday after Wednesday's modest Fed day rebound. The bears are putting the pedal to the metal in this environment, as they tend to do, but the rubber band has probably gotten over stretched on the down side with this recent decline. The Dow closed almost 200-points off the lows, but still lost 741-points none-the-less. Bonds and gold were up as we start seeing signs of a flight to safety from investors.

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Yesterday the advance / decline numbers were about as bad as they ever get. We said this a week or so ago and that obviously didn't create a low, but it tends to be a series or two or three of these kind of lopsided days that eventually carves out a low. One the NYSE the declining volume outnumbered the advancing volume by an unheard of 14 to 1.



If you have been around as long as I have, you seen these kind of days and these kind of markets before. Until the peak last January, every pullback, correction, and bear market led to another new all time high. We just happen to be in one of the bear markets right now.

That said, it's not as easy as just buying and holding and waiting until the market eventually makes new highs because sometimes it can take years, or even decades in some case (Japan in the 1990's), before the new highs are seen again. But that doesn't mean the market will go down every day, every week, or every month during that time.

Picking tops and bottoms is tough, but catching short term lows to buy, and short term rallies to sell can work. You just have to be nimble, have a plan, and get a little lucky, but it isn't easy because of the emotional aspect of the entire process. Stocks tend to rally just when you've given up on that possibility. And in a bear market they will roll back over just when you think the relief rally is for real.

By the looks of most of the various sentiment surveys, investors are extremely bearish. Here's the result of the latest AAII Investor Sentiment Survey showing just 19% of investors are bullish.


Source: www.aaii.com


It's nothing we haven't seen before and we tend to post this Cycle of Emotions chart every time we sense panic and anticipate a capitulation, which always seems to come later than we expect. The best opportunities come just when you think that the market will never go back up again. But as you can see, panic and capitulation come before the emotions hit rock bottom and the bear market bottoms.



We're in that kind of an environment now and this too shall pass. Don't believe that it is "different this time." We've had more mild corrections before, and we've seen worse. The bear market may go on for months, although believe it or not this current bear market is already the 9th longest ever, for the U.S. market. Or the bear market could end in the coming days. No one knows. All you can do is weigh the risk / reward of buying the current levels and decide if the risk is worth the potential reward, and the answer may not be the same for all of us.

It's getting ugly enough to see some relief, but again the market seems to move in one direction longer than we'd ever anticipate. Markets trend on the fundamentals but trade on emotion and sentiment, and when these are at extremes, it tends to mean at least a short-term relief is becoming more probable. Stay defensive -- or stay nimble. Both can work in a bear market.

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I'll just post the S&P 500 and the bond chart today. The other stock funds are basically telling us the same story.

The S&P 500 (C-fund) fell through its descending support line but the late bounce off the lows had it close above the line, and that kept it within the red channel. The fact that the open gaps didn't get filled right away could be a concern, but gaps tend to get filled eventually so it's not like the market will ignore them. Volume was up but not extreme yet, which we'd like to see, although it's not necessary for a low.




BND (bonds / F-fund) was up as investors finally looked for some safety and yield while stocks tumbled.




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Thanks for reading. Have a great weekend!

Tom Crowley



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