TSP Talk – Rally Quickly Fails, but Technically Still OK

Welcome to our Monday morning TSP / market commentary: (Updated daily at TSP Talk)

Stocks could not follow-through on Friday after Thursday’s big reversal day, as the Dow gave back 338 of Thursday’s 553-point gain. The TSP stock funds dropped between 4% and 5.6%, which is really amazing, but quite routine lately.

If there is any bright spot, the market gave back less than 50% of Thursday’s trough to peak rally. This can be considered a technical retracement and if the market can hold up well this morning, we could see the rally resume.

Here’s what I mean. The S&P 500 dropped 38-points on Friday, which puts it about 40-points below Thursday’s high. The low On Thursday was 819, and the high was 913. That’s a gain of 94 points. So the 40-point decline is within the range of a reasonable retracement, but it is not giving the bulls a warm and fuzzy feeling. Today’s action is obviously important. I will be watching 866 closely as it will be the 50% retracement area. If it gets below that, be very careful. The 840 level is the drop dead level. It must hold above 840 or I won’t even considering the stock funds.

Chart provided courtesy of www.decisionpoint.com

The NYSE overbought/oversold indicator is still oversold at -719. This keeps the ball in the bulls court, but if we see the -0- level or higher, the bears will be ready to pounce again and it will get tougher to sustain a rally.

Chart provided courtesy of www.decisionpoint.com

I had mentioned and posted the chart below a couple of times lately, and the folks at decisionpoint.com actually did a spotlight chart on it this weekend, saying basically the same thing I have been saying; and that is that the Rydex Traders are acting way too bullishly considering the current market environment. This indicates some complacency from the “dumb money”, which is rarely a good thing.

Chart provided courtesy of www.decisionpoint.com

Normally when the market is near its lows, these traders are selling their bullish funds and either buying bearish funds or moving assets into a money market. This is showing us the opposite.

I would pose a theory that perhaps they are moving out of money markets and into their bank accounts, because from what I understand, money markets are not FDIC insured. The hole in that theory is the amount of assets going into bear funds is declining sharply as well, so they actually do seem to becoming more bullish – which historically has not been a good sign for stocks going forward.

On Friday I mentioned that this week is options expiration week, and as bad as 2008 has been, 8 of this year’s 10 option expiration weeks have actually ended in positive territory. Only January and June were negative. If you are so inclined to try to play the stock funds, there is some indication that the I-fund could start to outperform, as the dollar may be getting a little “toppy”.

Chart provided courtesy of www.decisionpoint.co

I am not saying that the I-fund will go up. But if the dollar does pull back, look for the I-fund to do a little better than the C and/or S funds – whether they are going up or down.

I would look for the dollar to pullback to the 20-day moving average, the 50-day moving average, and possibly even to the rising support line, which would be a 2%, 6%, or 8% decline respectively from the current level. This is a short-term observation and all bets will be off if the dollar does reverse up and make a new high.

As if on queue, Trader Fred gives us a little confirmation of this prediction. Once the TSP trading limits became effective, Fred has been including a free daily supplemental report to the subscribers of his TSP trading system. These signals are geared toward ETF trading and are not signals for TSP accounts as they do not take into consideration the new TSP trading limits. His international ETF buy / sell signal just went to a buy for COB (close of business) today. Again, this is not a signal from Fred to get into the I-fund in your TSP account. This is possibly just a short-term buy signal to buy an international fund if that is something you do in your personal accounts outside of the TSP. He could easily get sell signal as soon as tomorrow.

Wow… I made a huge mistake on the above paragraph – Trader Fred’s signal was to sell short the international stock ETF by buying the ETF called EFU, which shorts the EAFE. Wow, my apologies.

I want to tell you about the work I have been doing on the Sentiment Survey System. After doing so well in 2006 and 2007, we realized pretty quickly this year that the buy / sell signals were not working well in this bear market. I did some tests and may have found a decent adjustment. I’ll wait for another night to go there.

Special note for GovLoop.com members. At TSP Talk, we look for opportunities to move our money around to try to take advantage of potential short-term market rallies, and protect ourselves against market declines. The market is obviously in a precarious position, but there can be short-term buying opportunities found in bear markets. Caution is warranted, and this activity can be risky, but we believe this approach is actually less risky than the often recommended strategy of “buy and hold.”

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That’s all for today. Thanks for reading!

Tom Crowley
Commentary updated daily on TSPtalk.com