TSP Talk – Big week for the stock market

Good Monday morning govloopers! Here is your weekly dose of TSP Talk…

This may sound cliché, but this should be a big week for the stock market. After Thursday and Friday’s big losses, which erased the impressive gains made earlier in the week, the market appears ready to make a move. The problem is it could go either way.

We have data that could corroborates either side, the bullish or the bearish. The January jobs report will be released on Friday the 6th, and with estimates at -500K, surprises either way may put the exclamation point on a wild week. Why do I believe it will be wild?

For one thing, the wedge formation on the S&P 500 is getting close to getting broken on the downside. If that does break, we could see a nasty sell-off. If it holds, we could see rally all the way back over 900, although there is some weaker resistance near 850.

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

The PMO indicator gave us a cross-over sell signal signal a couple of weeks ago and, after an oversold bounce right on queue, it has turned back down. That’s a bad sign.

If there is a positive for this week, it is that last week’s TSP Talk Sentiment Survey saw the bulls to bears ratio move below 0.50 to 1, a reading which preceded some extremely positive weeks last year, but also few negative weeks. For those following, the new bear market parameters puts this system into a buy signal for this week with that 0.45 to reading, but expect some volatility as well.

During a 5-week stretch in October and November, we had three weeks with a ratio under 0.50 to 1. The week of 10/27 saw a 10.5% gain, the week of 11/24 had a 12% gain, but the week of 11/10 experience a 6.2% loss. We haven’t seen weeks like that, up or down, since, so I think we could be in for some volatility.

We also had a couple of weeks last June that witnessed a reading under 0.50 to 1, and they each saw losses but they were more modest. However, since October ’08, we have reached another level of volatility with weekly moves of 5% or more being much more common.

The volatility index (VIX) seems to have bounced off of its lower Bollinger Band after moving below 40, but it also found resistance at the 20-day moving average. If it makes its way up to the upper Bollinger Band the S&P could be looking at a test of the lows made in November.

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

I am still keeping an eye on bonds and the F-fund as the 30-year bond continues to slide, but the bond ETF – AGG, which we follow as a guide to our F-fund, continues to hold support. Like stocks this could break either way, and I suspect the AGG and S&P 500 will move in opposite directions if there is a big move in stocks this week.

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

The AGG PMO indicator would indicate that this is a serious downtrend, but it could also be due for an oversold bounce before the downside continues. This is speculating, but that would coincide with a potential test of the November lows for the S&P 500. If that happens, bonds would likely rally. What happens from there, I don’t know.

I tend to think that the S&P 500 has another leg down in its future, but if the charts and indicators tell us otherwise, particularly if the November lows hold a test, it could be a nice buying opportunity. Until then, be careful!

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

Tom