TSP Talk – In the Middle

Thanks Steve, for the opportunity to post. To view the full article with charts, please go to TSP Talk for the daily market commentary, or here for 11/10/08’s specific article. I write a daily commentary on TSP Talk but I will likely just post Monday’s articles on GovLoop.com.
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What a week! Tuesday saw a huge Election Day rally in the TSP stock funds. Wednesday and Thursday greeted Wall Street with one of the worst two-day performances it has ever experienced. Then stocks rebounded strongly on Friday recouping some of the losses with a 3% rally.

At 931, the S&P 500 is now sitting almost directly in the middle of what we are calling a trading range. We could see 1000 next, or 850. It really is a tough call with many of the overbought/oversold indicators sitting near neutral at the moment.

I circled the high volume capitulation day above, which is still holding as the low of this bear market. That low is just that, a low for now, as it does not indicate THE bottom. Taking a look at the bear market of 2000-2002, there were several high volume reversals that led to strong rallies, but the bear market’s downward trend continued. The 17% rally we have seen from bottom to top since the October 10 low is typical. It can still go higher, but there is no reason to believe that we have seen THE bottom – not based on this data anyway.

As far as sentiment goes, the AAII Investor Sentiment Survey spiked sharply in favor of the bulls last week (which is bearish for stocks from a contrarian perspective). The 45% bullish reading, and the 1.36 bulls to bears ratio were the highest readings since last May. The last two moves toward these levels came near short-term tops.

Surveys tell us what people are saying they believe market will do. Rydex mutual fund assets tell us what people are actually doing with their money, and they are in agreement with the survey. Based on where the Rydex traders are putting their money now, they are as bullish as they have been all year. Actually the 0.87 reading is the highest (on the chart / lowest in number) since late 2006. Again, this type of optimism has come near short-term market peaks.

The dollar has been consolidating from the explosive move higher in October. The pennant / wedge it has been forming is a continuation pattern, meaning it tends to breakout in the direction of the trend before it formed the pennant. It could float within the pennant for a few more days, but we’d look for a breakout to the upside when all is said and done. It is not uncommon for these wedges to experience an initial failed breakout in the opposite direction, before it corrects and heads back to the actual breakout.

I am not overly confident in trying to pick the direction of the market in the coming days, but I am still leaning toward seeing a new low eventually. That doesn’t mean we won’t see a nice rally first. I am just reluctant to be a buyer this early in the month. I think I would rather be a buyer toward the end of the month when the Thanksgiving rally kicks in. Once again, the TSP limits are affecting how I am playing this.

That’s all for today. Thanks for reading!

Tom