TSP Talk – Patience or Chase?

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

After a strong housing data report, and some positive comments from Ben Bernanke on the economy, the major stock indices rallied nearly 2% on Friday. The TSP stocks funds did just as well, led by the 2.3% gain in the I-fund after more weakness in the dollar.

Unless something different happens in the next few days, these market commentary will likely be short and quite boring this week. The market seems to be on a mission to completely frustrate every bear, and every investor that is in cash waiting for a buying opportunity. We’ve seen this before and you basically have two choices: Patience, or chase. Neither of those two options make for good commentary.

The only new observation that I can come up with today is the new divergence in the MACD Histogram indicator. Since December of last year, I can see five distinct MACD divergences. Three of the prior four did a good job in telling us what might happen next while one, the strongest of the four, wasn’t quite as much help.

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

In early December to early January the MACD Histogram was moving downward while the S&P 500 sloped upward. This negative divergence portended the sell-off we saw in January and February.

Then, from mid-January to early March, the MACD was basically flat (no lower low) while the market was making a significant lower low. This was a positive divergence and should have been a good indication that a future rally could be in the works – which turned out to be the case.

The third positive divergence came from mid-June to early July as the MACD made a higher low while the S&P made a lower low. The market took that cue and rallied soon after.

The only one that did not work well was the long negative divergence in the MACD from mid-March until late May, while the S&P 500 rallied. This might have indicated that some weakness was coming, and while the market did pull back some, I would have expected the large divergence to give us something more significant in downside action when the market did pull back.

Now we have another slight negative divergence forming. The MACD has been falling sharply since the late July high (on the indicator) while the S&P 500 has made another higher high in price. We don’t know just how long the divergence will continue but it is setting us up for a possible buying opportunity in the days / weeks ahead.

Because of this, I am opting to stay patient here, rather than being a chaser.

That’s all for today. I told you it would be short and boring, but as always, thanks for reading!

Tom Crowley
TSP Talk.