TSP Talk – Buy the Dip?

Weekly TSP Wrap-up from TSP Talk

Looking for a buyable pullback

The markets were on a bit of a roller coaster ride last week as we saw everything from the healthcare bill getting passed, to ongoing bailout talks for Greece, and a suspicious sinking of a South Korean naval ship, all affecting the direction of stocks and bonds.

For the week, the TSP stock funds closed higher. The C-fund was up 0.60%, the S-fund added 0.63%, and the I-fund ticked up 0.07% as a stronger dollar held it back. The bond fund was also affected by the strength in the dollar, as it lost 0.42% on the week. The G-fund added 0.06%.

For the month of March, all of the stock funds remain in positive territory with the S-fund leading the way with a +7.09% gain, followed by the C fund at +5.75%, and the I-fund at +5.29%. The F-fund is now down for the month at -0-22%, while the G-fund is up 0.23%.

The breakout in the S&P 500 has been able to hold, and while it is due for at least a short-term pullback, there is plenty of support underneath it to keep the ascending trend intact. The 1150 area may be the strongest area of support for this coming week. That is where the January highs meet the 20-day exponential moving average (EMA), and support from the rising trend line.

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

One of the market leaders, the Dow Transportation Index, has pulled back a little more, which makes me believe that the S&P 500 could follow, but while it broke the below the rising trend line, it still remains above the January high and the 20-day EMA.

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

The reason that 20-day EMA is so important is that strong bull markets tend to hold that level when there are the inevitable pullbacks. The 50 and 200 day EMA’s are also strong support areas but the 20-day EMA is the first line of defense, and as you can see below in the 2006-2007 chart of the S&P 500, buying at the 20-day EMA worked for many, many months.

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

Of course it will eventually fail, but until it does we should give it the benefit of the because we don’t know how long this bull market is going to last. It could be days, weeks or months, but the S&P 500 will have to get below the 20-day EMA before it does end, and that will be our first warning.

There is always the chance of an influential news event affecting the market and taking it down sharply and very quickly as we saw in early 2007 when China’s stock market experienced a sharp one day correction (see above chart), and our markets quickly followed suit. There’s nothing you can do about that if you are in the market, but those events are the exception rather than the rule.

My concern is that Greece could be this year’s China, but it is looking more and more like they will be getting some help, although they are calling it more of a “band-aid” deal at the moment, which doesn’t exactly boost confidence.

Good luck, and thanks for reading. We will be back here next week with another TSP Wrap Up.

Tom Crowley

www.tsptalk.com