Bottom of the Range, but H&S Looms

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

Stocks sold off hard on Thursday on light volume holiday trading, after a weaker than expected jobs report. All three TSP stock funds lost about 3% on the day, while the F-fund (bonds) inched up 0.3%.

Estimates for the June jobs report were for a loss of 365K jobs, so the actual loss of 467K jobs was met with a strong negative reaction as the argument for the resurrection of our economy may be losing merit.

The 9.5% unemployment rate actually came in a little lower than estimated 9.6%, but if you remember, in January the incoming Obama administration had predicted that with a stimulus package, unemployment would not reach 8% this year, so this number continues to disappoint. That prediction has since been revised to 10%.

The S&P 500 has formed a very clear head and shoulders pattern, which started in May. The neckline runs from about 875 sloping up toward 890, and Thursday’s close of 896 puts it just above that area, which also happens to be the bottom of the recent trading range.

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

It is again trading below the 20, 50 and 200-day exponential moving averages. The bulls are hoping that this move to the bottom of the trading range is just another buying opportunity, while the bears expect a break of the neckline, which would produce an initial downside target just above 800.

Taking another look at bond sentiment (for the F-fund), the bullish percentage is still down in the buy zone below 35%, meaning investors are still quite bearish on bonds, which from a contrarian point of view, would be bullish for bonds.

Below I’ve marked in green, the areas that would indicate a buy where the bullish percentage moved below 25%, and the subsequent sell area, marked in red, where the bullish percentage moved above 72%. Some of the rallies were short but from buy point to sell point, each instance produced a positive move for bonds. The current bullish percentage for T-bonds is 29%.

Chart provided courtesy of www.sentimentrader.com

Last week’s TSP Talk Sentiment Survey came in at 40% bulls, 43% bears last week, for a 0.93 to 1 bulls to bears ratio. Although that is a neutral reading and the system is already in a sell signal, the 0.93 to 1 ratio was very close to initiating a new sell signal, which is any ratio above 1.0 to 1.

I’ll be curious to see how investors react early this week. Things could remain volatile as a new earnings season starts to kick in, but many times the market will rally a few days after a sell-off is triggered by a negative surprise in a jobs report, and since we are near support, some bulls may step in here. But if that support is broken, watch out! The S&P could see 800 very quickly. That would be about an 11% drop from where we are today.

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

Tom Crowley
TSP Talk