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TSP Talk: The stalled rally turns south

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Stocks opened higher yesterday, but it turned into a Turnaround Tuesday as the opening 1% gain vanished quickly and that triggered a stampede for the exits. The Dow lost 491-points, and the 79-point loss in the S&P 500, along with the 12-point loss on Monday, nearly erased all of Friday's monster rally. It lost 2% on the day, as did the small caps fund. The Nasdaq lagged with a near 3% decline.

Daily TSP Funds Return
It was a heck of a morning as someone threw us a big curveball near the opening bell. We saw the S&P 500 up over 1% in that first 10-minutes of trading but 30-minutes later those buyers were scrambling and the bears went into full blown aggressive selling mode. You can see that almost all of those 10-minute bars on the chart between the opening and closing bells are red meaning stocks went lower almost all day long.

Yesterday I mentioned some of the things I was watching, and a little worried about. I said...

"I am watching the dollar, oil, obviously the indices, but one thing that has me concerned is the HYG chart. It closed at its lows yesterday and remains in bearish looking flag. If this breaks down I won't be as bullish on stocks as I'd like to be."

The gist being that a strong dollar, higher oil prices, and drop in HYG (the credit market) mean be trouble for the recent rally. Well, it turned out to be the perfect storm as they each went against the market yesterday. The dollar and the price of oil were up, and in the case of oil it broke above its 50-day EMA, while HYG broke down from dreaded bear flag. Not good.

Because of the near extreme bearish sentiment that we have seen in various indicators - after the recent rally relieved some of that - it tells me that maybe this move lower has the possibility of being muted and maybe it just fills the small open gap near 3800 on the S&P, or perhaps it falls enough to test of the lows from a couple of weeks ago, but that will depend on some of the inflationary data, jobs report, and earnings that will start coming out in July. A full out new leg lower at this point would surprise me. I'd expect that to come later in the summer, but I guess things could be worse than we see on the surface.

One more time about JP Morgan predicting a 7% gain this week to end the 2nd quarter: Do you think they were buying or selling today?

The S&P 500 (C-fund) went from flirting with the open gap near 4000, to down below the gap it had filled on Friday, and now it is flirting with filling the gap from Monday near 3800. As I had been saying, I expected either an overshoot above that 4000 gap, or a non fill, because everyone was focused on a move up to 4000 where they would sell. It's never that easy when we are all seeing the same thing. The PMO indicator on the bottom looks like it is about to create a failed crossover and we have seen this a couple of them during this bear market. Neither ended well in the short-term but the one in March did lead to the first decent bear market rally a week or so later.

The DWCPF (S-fund) is tracing out almost the same pattern as the S&P 500. One thing that we normally see during a major sell off is the small caps lagging, but they actually kept up with the large caps yesterday, after slightly outperforming them on Monday.

The EFA (I-fund) looks like a piece of Swiss cheese with all of the open gaps and any one of them could get filled so it is really tough to pick a short-term direction. The momentum is now down, and that could be a bear flag forming, which would not be good news.

BND (bonds / F-fund) will really have to improve before I would consider buying bonds. I'm not good at bottom fishing the F-fund.

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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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