A Look Back to 2003

Good morning! It’s your weekly Monday morning dose of TSP Talk.

Stocks are certainly due for some sort of a pullback, but that could just be a short-term bump in the road ahead. Looking at chart after chart suggests that this market may be for real, despite our fears about the economy.

Buying at the bottom is always the ultimate achievement, but rarely a reality. Some experts did it. Some just got lucky. Most did not. We have been looking for clues as to whether we are seeing a bear market rally, or the start of a new bull market. Two of the clues I have been looking for are, a move above the 200-day EMA, and seeing the 50-day EMA cross above the 200-day EMA. Right now only the first has happened, but the second takes a little more time to play out.

The S&P 500 is looking good, but it is overbought in the short-term. This break above the 200-day EMA changes everything, and as long as it stays there, I will be looking for opportunities to buy, rather than play defense. If the S&P does an about-face, and 200-day EMA does not hold, then it is back to defense. But right now, its tough to deny that this chart is looking much better than it was just a few weeks ago.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

I know there will be those out there saying… Oh sure, now you want to buy, now that the S&P 500 has rallied 45% off of the bottom? The answer is, yes. I did make a few short-term buys this year, but I sold very quickly because we were still playing under bear market rules. The TSP is my retirement money and you don’t always want to take a lot of chances in your retirement account. This new development in the charts changes things. If and when the S&P 500 does eventually make it back to it’s 2007 high we are looking at an additional move higher of about 60% for the market.

As I said, we do still want to see the 50-day EMA move above the 200-day EMA. When the 2000-2002 bear market ended, we saw a couple of similar rallies off the bottom, but only the final one gave us the confirmation of the 50-day EMA crossing above the 200-day EMA.

In April of 2003, the S&P crossed over the 200-day EMA. There were a couple of prior moves above the 200-day EMA in 2001 and in 2002 so when it happened in 2003, many were skeptical. The difference in 2003 was that the 200-day EMA was broken for more than just a few days and, about a month later, the S&P 500 pulled back to the 200-day EMA, and it held. That pull back in May of 2003 was a drop of over 5%.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The market started to rally again, and a couple of weeks later, the 50-day EMA crossed above the 200-day EMA. Although you might have missed a large part of the rally off of the bottom, that crossover, which occurred at about 950, was the ultimate buy signal. And as you can see below in the longer-term chart, buying at 950 was not a terrible thing to have happen.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Because of the rally in stocks, the I-fund has been behaving very well lately also. But the weakness in the dollar has magnified the strength in the I-fund. It follows the chart of the S&P 500 pretty closely, but you can see that the breakouts happened a little earlier and the 50-day EMA is just about to cross above the 20-day EMA. It should probably happen this week.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

So, while I am starting to take on a more bullish stance (probably the kiss of death for the market) I am still concerned that we will see an overbought sell off very soon. That is just fine with me for a couple of reasons. First, I am not in the market right now and I am out of interfund transfers for July. Also, as we mentioned above, a pullback after a rally, preferably back to the 200-day EMA, gives us a nice area to be a buyer.

But, if the S&P 500 gives up the 200-day moving average on a pullback, all bets are off and I will go right back into defensive mode. This is a good time to pay close attention to the market.

That’s all for today. Thanks for reading. This market commentary is updated daily on www.tsptalk.com.

Tom Crowley
TSP Talk