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TSP Talk: End of quarter rebalancing rally?

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Stocks explode higher on Friday with a surge of buying at the open, and again at the close, with very few signs of selling in between. The Dow gained 823-points and it was the lagging index percentage-wise with the S&P, Nasdaq, small caps and Transports all gaining between 3% and 4% on the day. The question on all investors' minds is whether this is an indication of a bottoming process, or if the action is just a typical bear market rally destined to fail again.

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The open gaps that we have been showing on the charts are starting to get filled, and everyone knew those were potential relief rally targets, and the upside momentum could get investors to start dumping money back into the market but it could be an eventual trap.

When I see headlines like this from large financial institutions I get a little suspicious, even if it turns out to be accurate:

JP Morgan sees portfolio rebalancing lifting U.S. stocks 7% next week

It is typical to see rebalancing at the end of the quarter as money managers and investors may be light on their stock holdings compared to other assets, as stock values decreased sharply in the 2nd quarter. But it doesn't have to last and it could just be an artificial rally that may need to get sold. Plus the fact that we all know of this, tends to lessen the effectiveness of this normal phenomenon.

The 2nd quarter has a few more days left in it and even with last week's 6.5% gains, the quarter is still left with some big losses in the stock funds, so there is some room for that rebalancing. These are just the 2nd quarter returns so far.

Looking at the end of the prior couple of quarters shows decent rallies toward the end of the month / quarter, but it didn't last heading into the following month / start of the next quarter. Just something to consider.

I don't generally look long-term because we never know what's coming down the road, but I had been anticipating some kind of rally in the short-term, especially with the open gaps overhead on the charts. Even the weekly chart of the S&P 500 had a rare open gap on it, but it is now filled after Friday's rally. The chart also happened to find support exactly on the 200-week EMA, so it has been a clean technical rebound so far, despite the carnage.

Just for giggles, I compared the current weekly chart to that of the weekly chart in 2009 - the bottom of that devastating bear market. While the magnitude of that 2008 bear market was much more severe, there is a similarity in the way that both weekly charts filled an open gap and the week's rally closed at the highs of the week. The volatility in the days following that 2009 low was still high, but it did turn out to be THE low of that bear market.

I don't know how the rest of the year will play out but I would probably expect the bear market to hang on into August / September which are historically the roughest two months of the year for stocks, but it doesn't mean we can't get a decent sucker rally in the interim. The questions will be how long can it last, and how high can it go? Hopefully the charts will help us make some good educated guesses.

The S&P 500 (C-fund) was able to fill in that first large open gap on the chart with a huge rally on Friday, and the next one above is still open just north of 4000. Friday's rally did open a small gap below near 3800 so that may be a hint that the downside may not be completely done, although gap and go rallies can stay open for quite some time.

The DWCPF (S-fund) jumped 3.45% on Friday which pushed it above its 20-day EMA for the first time in weeks, but it didn't quite fill in that first open gap like the S&P 500 did. If it can do that there is a heavy dose of resistance near 1700, including another open gap and the 50-day EMA, which has been holding as resistance since early April.

The EFA (I-fund) gained about 3% on Friday and it too still has large open gaps to fill on the upside, but Friday's higher open also created a new open gap down near 62, so there are targets above and below making it less easy to pick a true direction, although at least filling that first gap near 64.50 may be the first order of business.

BND (bonds / F-fund) was down on Friday and the rally off the June 14 low may be running into some resistance. There is a little room on the upside if it wants to try to test that resistance, but the bond market rally may be running out of time.

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

Tom Crowley

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S&P500 (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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