Top, Pullback, or Correction?

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

Friday was a pretty volatile day for stocks as the indices closed lower but they were up as late as 3:00 PM. The Dow shed 42-points, and all of that came after it scratched its way back to even with an hour to go before the close, after being down 70-points earlier.

The late selling is worth noting as the market had been closing strongly almost regularly during this bull market rally, but in the last few days, we’ve seen some late selling. The late trading is usually considered the “smart money”.

The TSP Stock funds each lost about a half of one percent on the day, while the F-fund (bonds) were up slightly.

The S&P 500 has now clearly broken back into the rising trading channel so the attempt to break out above the upper resistance line was thwarted. Now the question is whether this little pullback is an imminent buying opportunity since buying dips is the way to play a bull market and usually after 2 or 3 down days things will turn around. Or, will this pullback turn into more of a correction, which I’d define as a 10% decline off of the recent peak?

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

The other option is that the market is putting in an intermediate term top that could break below the rising trading channel. With the market in full bull market mode, you’d probably have to give the benefit of the doubt to a bullish outcome, but you might want to be ready to abandon ship if the technicals break down.

A closer look at the S&P 500 chart shows that the 20-day exponential moving average (EMA) was tested on Friday, and the S&P managed to close above it. That was our first target for this pullback and it has been met.

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

The next pullback target is the 1016 area, which is what it would take to fill the gap that remains open. Then comes the 50-day EMA which is currently 1011, but rising. There is also a possibility that 1039 could act as support as it was the prior peak in August.

Bonds have been moving up; particularly as stocks have struggled, and although almost everyone believes bonds are overbought and yields are way too low, the chart indicates that we could see a break down in the yield of the 10-year T-note, which would send bond prices and the F-fund higher if that happens.

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

The yield, currently 3.33%, is below the 200-day EMA, which is technically a bad sign (for yields, good for bond prices) but it is above the support line near 2.27%. Whether the support breaks or holds may depend on what happens to the stock market. If stocks continue to pull back, yields may follow and the F-fund would benefit. If stocks bounce back I’d look for support to hold on the yields, and bonds and the F-fund might have a more difficult time.

The last two trading days in September are historically weak, but early October is usually pretty strong. These charts are posted on TSP Talk.

How it plays out this year we don’t know, but seasonality will be on the side of the bulls when the new month starts.

The TSP Talk Sentiment Survey came in at 0.80 to 1 bulls (39%) to bears (49%). That is overly bearish and keeps the system on a buy signal for this week.

This is a reminder that Scribbler’s TSP & Economic report has changed from a twice weekly report, to a daily report. Because of this the price of the subscriptions will be going up beginning Oct 1st. This will NOT affect current subscribers. Both monthly and annual subscribers will lock in the old prices when renewed, as long as their subscriptions remain active. More info.

Thanks for reading! We will see you tomorrow on TSP Talk.com.

Tom Crowley
TSP Talk