TSP Talk: Options Week Over… Can Rally Continue?

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

Stocks bounced back somewhat on Friday as the Dow picked up 36-points and the TSP stock funds were up a modest 0.02% to 0.26%. The bond fund dropped 0.26%.

We speculated a little last week that, despite the overbought and overly bullish conditions, the market might continue to rally during options week because of options related trading. But now options week is over and the market will have to prove itself.

Not that the market is ready to roll over back into a bear market, there’s nothing that supports that, but in the short-term we are seeing signs that stocks need a break. There are signs that a pullback could be imminent, but this market has surprised many investors and traders this year, and I wouldn’t want to assume too much here.

The S&P 500 moved just above resistance last week, and has remained there for 3-days now. I believe we should find out if this will hold in the first 2 to 3 days of this week. If the S&P can remain above that resistance line for the next 2 to 3 days, I will be more willing to believe that it can hold. But for now, I do have to guess that it will pull back into the trading channel early this week, but that would be a healthy unless lower support breaks as well.

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

We are getting some nice confirmation of this market rally from the housing sector. The Housing Index chart is looking great – although a little extended like the other major indices.

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

That is a great sign for the economy going forward, but looking at the chart, there are some short-term concerns.

Looking at sentiment from a put/call ratios standpoint; one of the “dumb money” ratios, the Equity put/call ratio, is at it’s highest level (lowest in value) since the market peak in 2007. Certainly we’d expect people to be less bullish during the bear market than after a monster 60% rally, but investors may be getting too complacent.

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

Notice that the “smart money” OEX put/call ratio was quite low during the 2007 peak as well.

The dollar has broken below the falling support line and, in step with typical technical analysis, the dollar has rallied back up the the old support level, and it could now act as resistance.

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

A falling dollar won’t kill the stock market, but it might produce an inflationary environment at some point, and that won’t be good for the economy or stocks. For now, it does help the I-fund in that it should outperform the the C and S funds, whether the three funds are moving up or down.

If the resistance does break and the dollar is able to rally, it could produce that pull back in stocks that we have been anticipating. A stronger dollar makes things it buys worth less (not worthless) including other currencies, commodities, and stocks.

As a reminder, last week’s TSP Talk Sentiment Survey came in at 55% bulls, 35% bears for a 1.57 to bulls to bears ratio. That would be a sell signal if we were still in a bear market, but it is just a neutral signal in this bull market.

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

Tom Crowley
TSP Talk.