TSP Talk Blog

Stock were mixed on Friday after a stronger than expected jobs report. The initial reaction was very negative as the market has been looking for a slowdown in the jobs market to curb inflation concerns. However, the dip buyers who believe the Fed has pivoted their monetary policy to a less hawkish approach, showed up to buy the early weakness and the indices closed well off their lows and near the highs of the day. The Dow and small caps both finished with gains, and bonds rallied on a decline in yields.

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The November jobs report came in with a gain of 263K jobs, 63K above estimates which initially creating concerns that the Fed will see this as inflationary, which could impact their decision on tapering their interest rate hikes. For those who saw the Fed's comments last week as being less hawkish, they ignored the hot jobs report number and jumped into the fire, did some buying, and that sent stocks higher into the close, but as we said, the indices did closed mixed.

The initial sell off actually sent the indices into the red for the week but the afternoon rally helped push them back into positive territory and all three TSP stock funds ended the week with a gain of 1% or more.

Is it too early for a Santa Claus rally? Technically, yes. Historically, or "officially" the Santa Clause rally doesn't begin until after the 20th of this month, and actually the middle of December has some flat to bearish tendencies. But there are no guarantees, just tendencies, and we don't have to go too far back to remember what happened in December of 2018. It was an awful month and stocks were down almost every day until after Christmas.




I went deep into the charts over the weekend, and while things can certainly change, and perhaps the Fed did pivot and we can say goodbye to the bear market, but as of right now, nothing technically has shown this.

This weekly chart of the S&P 500 shows that the index has come a long way after successfully negotiating its 200-week EMA in recent months, but now it is back up into a possible trouble zone. The 50-week moving average and the descending resistance line off the 2022 peaks are not far above Friday's closing numbers. Can it overshoot? Absolutely, and they love to do that to suck people in. So, even if it does fail , a move up to 4150 or 4200 could occur only as a smoke screen to suck those people in.




Of course, when a bear market turns into a bull market it happens right at a point where we have been programmed to sell the rallies and that's why, when it happens and many folks are leaning the wrong way, the rallies can be explosive.

But here are some examples of the 200-day moving averages holding, and overshooting in some cases, this year that had similar fake out effects.




The S&P 500 (C-fund) did close above the 200-day simple moving average (orange) on Friday and the exponential moving average (blue), but it is still below the descending resistance line, just as we saw in the weekly chart above. But this charts shows a little more. We see a PMO momentum indicator nearing a level that led to a peak back in August. Also...



... the VIX / Volatility Indicator, is down to near 19, which this year has been a better time to be a seller than a buy.

So again, the bear market could be coming to an end, but as of now we don't have any evidence that this time is any different than prior bear market rally peaks.

The I-fund has certainly been hot this fall after November's 13.7% gain. That's after being up 6% in October. But most of that appreciation was a result of the U.S. dollar declining sharply. Can the dollar keep falling? Sure, and the recent breakdown from the bear flag may suggest further downside, but the 200-day moving average is trying to catch it now, and if it does bounce, the I-fund could be vulnerable to profit taking.



But as far as the EFA chart which the I-fund tracks, it has done a great job of ramping above several resistance areas.

We also have different stories developing in the different indices. The Dow, the more defensive large cap index which tracks 30 of the largest companies in the U.S., has been doing a great job and is flirting with a breakout above the August highs. However...



... the more aggressive, tech heavy Nasdaq Composite not only is nowhere near its August peak, but appears to be at the top of what looks like a giant bear flag, which tend to break down. To be fair, there is a small bullish flag (blue) within that bear flag.

Can one of these indices break out while one breaks down? Probably not in this case. The more defensive Dow could continue to outperform but I think the Nasdaq would more likely take the S&P 500 (C-fund) along with it whichever way it finally breaks.

I might as well throw in the small caps S-fund chart up here as well. It has had a serious rebound off the head and shoulders pattern neckline and we are seeing a test of the middle of the head, which is not uncommon out of an H&S pattern. Now it is up against a descending resistance line (red) the 200-day moving average (blue) and perhaps some resistance from that orange trend line, which seems to be meaningful and is actually about 50-points above Friday's close - if it can break above those other levels.




Bottom line, the market is in an historically favorable month for stocks and perhaps we will see some overshooting of the rally after the Fed's potential pivot. I say potential because they are still raising interest rates and Friday's jobs report may suggest that inflation is going to be an ongoing problem. But the charts show some technical obstacles so being completely confident in anything on the bullish side seems premature.

The holidays could distort the action, or not - as we saw in 2018, but this market is not out of trouble just yet and any pre-holiday rally may be just lulling investors into a false sense of security.

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I hit all of the stock funds above, so that leaves the Bond market, which has been doing very well lately. BND (bonds / F-fund) had another nice rally on Friday, capping a 1.45% weekly gain for the F-fund. It's above resistance and still has a way to go before hitting potential resistance at its 200-day EMA.



With yields sliding lower, the bond fund could very easily outperform stock funds if we do get a recession. The Fed may eventually pause rate hikes and even be forced to lower rates, but that would likely be triggered by evidence of a recession, and in that case stocks probably won't react positively. But bonds will. We'll see.


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

Tom Crowley




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