Nimble

Good morning! It’s your weekly Monday morning dose ofTSP Talk. This market commentary is updated daily on www.tsptalk.com.

Stocks ended the day mixed on Friday as the S&P 500 and small caps closed relatively flat, but the I-fund picked up 1.6% as the dollar plummeted. The F-fund was up an impressive 0.6%.

For the week, the F, C and S funds all gained just short of 1%, while the I-fund picked up 2.6%, again because the dollar continues to fall. July, will be a tough act to follow as the stock funds all had big monthly gains ranging from 7.6% to 9.7%.

The S&P 500 has all kind of things going on, but the thing that strikes me first is the breakout from the huge inverse head & shoulders (H&S) pattern, which is a bullish formation. The target area for a this H&S breakout is a distance equal to the distance between the bottom of the head and the neckline, or the middle of the head and the neckline, so the that would be in the neighborhood of 1120 and 1220.

That is ambitious, particularly for those of us who still believe this economy is not in great shape, but the charts are telling us something different. There is some overhead resistance and we could see a short-term pullback, but the trend remains up.

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

My thinking is that I want to stay nimble; that is, be willing to buy dips, but continue to sell rallies. Of course the problem is that dang transfer limit. I would love to be a buyer if we get a pullback to the neckline and the 200-day EMA. As I’ve said many times, the 200-day EMA should be a great guide going forward. As long as the S&P stays above it, things should be OK. If it drops below it, you have to change gears – hence the nimbleness.

The dollar fell 1.3% on Friday, but worse than that, it made another lower low. It really needs to make a move back above that 78.50 or it looks like another leg down will be imminent.

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

The way to play the falling dollar is to take advantage of commodities (gold, oil, wheat, etc.), international stocks, and some U.S. companies that do a lot of business overseas, all of which benefit from a weaker dollar.

You can see below that the EAFE, the international stocks index which our I-fund tracks, has done very well since the dollar peaked in March. From a technical standpoint there are some overhead gaps on this chart that have been, or could be filled in the near future.

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

Support is strong near 45, and the upside gaps that could be filled are at 51.5 and 57. The gap at 50.50 has already been filled.

Last week’s TSP Talk Sentiment Survey came in at 48% bulls, 40% bears, which is not as bullish as I would have expected considering the market strength. That would indicate that perhaps there is more upside to go.

Conversely, the Smart / Dumb Money indicator from SentimenTrader.com hit the sell signal level with the combination of a dumb money over 60, and the smart money under 40.

Chart provided courtesy of www.sentimentrader.com

These are not automatic sell signals, but it is an indication that some kind of pullback may be in the cards.

My plan is to stay nimble and continue to look for pullbacks to buy, and overbought rallies to sell. Everything I see technically, tells me I should be more bullish, but signs such as the Smart / Dumb Money indicators above, give me pause at the moment.

That’s all for today. Thanks for reading.

Tom Crowley
TSP Talk