TSP Talk Blog

The market has been climbing that wall of worry in the latter half of March as the bank failures have come out of the headlines and investors are now more focused on the Fed possibly pausing or cutting interest rates before the end of the year. The Dow gained 323-points, or 1%, and that was the lagging index of the major indices. Bond yields lost a large morning gain to end lower, sending bond prices and the F-fund up modestly. The I-fund broke out of its descending channel and the S&P is trying to be next.

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With no follow up banking issues in recent days, the market seems to be looking for a reason to rally, and ironically it is rallying on the prospects of a recession. That is because it would mean that the Fed would have to back off raising interest rates, and the lesson everyone has learned is to not fight the Fed. It may not be that easy for the stock market to keep up with investor enthusiasm because a recession will certainly take its victims before it is done, and the chances that the bank failures that we know were isolated is probably remote. Expect more banking headlines in the coming months.

The 10-year Yield was up slightly but closed off its highs as it continues to churn within what looks like a bear flag, and the right shoulder of a head and shoulders pattern, both of which tend to resolve to the downside, although as we have see in several charts lately, bear flags and H&S patterns have not broken down so easily. We'll see, and if the Fed is going to pause or cut rates later this year, it would make sense for this to break down, and that could give the F-fund a boost if it happens.




The S&P 500 broke down from its green rising trading channel earlier this month, but it has since ran back up to the bottom of the channel and is threatening to move back into that green channel. The same thing happened in September of last year, but that one didn't work out so well.



Why do stocks climb a wall of worry? The thing is, stocks don't tend to go down when everyone is expecting them to. Why? Because most traders and investors who claim to be bearish have likely sold already. So who is left to sell?

That may be over simplified but it is real. The "ROBO" put / call ratio is basically small order options traders, most likely the less sophisticated market participants. When this group is very bearish, it tends to mean the selling has been over done. It's not 100% foolproof in general but you can see that this group is most bullish when the market is near a top, and most bearish when near a low.

Chart provided courtesy of www.sentimentrader.com

Relative readings of high and low values can be observed here, taking into account the previous lows during the 2000-2002 bear market and the financial crisis. Anytime the value falls below 0.80, it is considered to be extreme. Currently, the value is at 0.84, which suggests a possibility of an upside action. However, the value was closer to 1.0 in October, which was also observed during the COVID crash lows, indicating a recent rally off the October lows. Hence, there could be more downside for stocks and a potential increase in bearishness from small traders, which could bring the value back down to near 1.0. In the above chart, bigger ratios are represented lower on the chart compared to smaller ratios.

Fundamentally this market has some issues and that can dictate the trend of stocks, but fundamentals don't move the market in the short-term. It's the people buying and selling. Right now the small investors are quite bearish. They could get more bearish before we see a bottom if that 1.0 ratio is the target again.

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The S&P 500 (C-fund) is now threatening to move back above a descending resistance line that started back in early February. It did close above the 200-day EMA for just the second time since March 6th, but now it faces a double dose of resistance lines. Can it climb that next wall of worry? It wouldn't take much movement, but it would take the bears giving up a line of defense.




The DWCPF (S-fund) had a big day but so far that hasn't changed the bear flag situation, nor taken out the old support line that may now try to act as resistance. That said, the bulls have some momentum and may be able to do what they did in January.




The EFA (I-fund) made a clear breakout above that descending channel, which I had believed was too large to be considered a bull flag, but it still acted as if it was a bull flag. It is actually nice to see a flag pattern do what it is supposed to do. There are three open gaps below so I don't know how long this breakout can last. This isn't really considered a market leader, but it does show that the weakness in the dollar could be a catalyst for higher prices.




BND (bonds / F-fund) has been on again off again this year with January up, February down, and March back up. Now it is pulling back from resistance with open gaps below. Many expect yields to come down in the coming months because of the recession concerns, so this may find support before moving to the lower end of that large blue range.




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

Tom Crowley




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