TSP Talk – Is fear finally too high?

Good morning. It’s your Monday morning dose of TSP Talk.

Stocks dropped about 1% again on Friday and it was quite a wild day. The Dow was down over 200-points at one point, came all the way back within 20 points of break even, before closing down 100-points. Volume was quite high.

You have to admit, things are pretty scary out there. The S&P 500 is still looking over a precipice ready to start a new leg down. The Dow and Dow Transportation Indices have both already broken below the November lows, and the Dow is now touching levels not seen since 1997.

I don’t know if you watched much financial news, or any news at all over the weekend, but all we are hearing about is the financial meltdown. Glenn Beck had a particularly gloomy show about the meltdown of America.

It reminds me a little of the “Stash away the duct tape — don’t use it!” scare that we had in February 2003. Fear over terrorism was very high at the time, and the market was still down 50% from its highs three years before. I certainly don’t want to predict that we are at a market bottom now, but you can see below where the peak of fear hit on the chart of the S&P 500 in 2003.

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

I am obviously interested to know when the market will hit a bottom, but who knows when it will come? We are still in a bear market and I will continue to just play the hit and run game. That is, staying on the sidelines until we get setups that suggest a higher probability of an oversold rally. I look for short-term pops, but sell rallies once they happen. Easier said than done, but right now it’s the only real way to make money in our TSP. We know what the buy and hold strategy has done to many TSP accounts.

The S&P 500 almost put in a very nice reversal day on Friday, but some late selling took that away. Volume was very high, something you’d like to see on a reversal day, and the index closed well off it’s lows. The ideal situation would have been to see a positive close, but the afternoon rally ran out of steam in the last half hour.

We have seen several of these high volume reversals that produced fairly significant 10% to 20% rallies, BUT you have to be prepared to sell the rallies as they have not been lasting.

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

With a large gap still open near 825 on the S&P (818-825) and the broken wedge pattern’s support level, which should now act as resistance, also at near 825, I could see a rally up toward that level. I’m not sure I would be brave enough to stick around that long, because these rallies can reverse back down so quickly.

I would be happy with a 2% to 3% rally to add to my account, but if the S&P was strong enough to see a move to 825, that would be a gain of 7% from Friday’s close.

Again, the MACD indicator above is showing a positive divergence. The indicator remains above the January levels despite the S&P making a lower low last week.

The NYSE overbought/oversold indicator has basically reached the -1000 level. -1000 is quite oversold despite the -1500 readings we saw in 2008.

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

As we mentioned on Friday, the TSP Talk Sentiment Survey came in at 27% bulls, 60% bears for a ratio of 0.45 to 1. One of the lowest ratios we ever get. We have seen some very big weeks, both up and down, in the market the last few times we had readings below 0.50 to 1.

All this said, I do want to disclose that Trader Fred is throwing us a curve today with one of his supplemental report signals. Members will see this in more detail, but let’s just say it is an interesting signal at this point in time. It is not a TSP account trading signal but this aggressive model is up over 19% in 2009 alone, trading ETF’s, so I take it very seriously.

One other interesting point; The 2000-2002 bear market saw a 51% drop in the S&P 500. The S&P 500 is now down 52% from it’s 2007 high.

Fear and anxiety are high, stocks and confidence is low. The market is very oversold and “the herd” is very bearish. This is a recipe for either a big rally, or a crash. How will you play it?

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

Tom Crowley