Turning Point, or Buying Opp?

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

Stock opened sharply lower on Friday after a weaker than expected jobs report, but quickly found its footing and spent the rest of the day trying to recover.

The TSP stock funds were down 0.45% to 0.75% and the bond fund dropped 0.11%.

September lost about 90,000 more jobs than the 175,000 that was expected, and the unemployment rate came in at 9.8%, which was in line with estimates.

The S&P 500 has now pulled back to the 50-day EMA, or just shy of it, as we saw a low of 1019.95 on Friday before the market started to rebound. On Friday I said it would not be a bad idea to buy in the 1015 to 1020 area. I did stick a toe in the water with a partial buy on Friday, but I will feel a lot better if the open gap between 1016 and 1018 gets filled early this week.

There is still a pretty large gap still open between 906 and 910 that I expect to get filled eventually, but whether than comes during this pullback or at a later date is hard to say. A lot of technical damage will have to be done to the chart before the S&P gets that low.

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

The MACD is showing signs of potential problems with the trend, but nothing big yet. The indicator made a lower low while the S&P 500 has not. It could be the start of a divergence that could be a concern.

The PMO indicator is pretty solidly into a sell signal now, but what I still like is the situation of the exponential moving averages. That is, the faster 20-day EMA is above the 50-day EMA, and the 50-day EMA is above the slower moving 200-day EMA.

During a bull market the 200-day EMA should hold firmly, otherwise it jeopardizes the integrity of the bull market. The 20-day EMA can act as support, but pullbacks will take it out if there are a couple of attempts, which is where we are now. We expected this, but now the 50-day EMA is being tested and if this is a true bull market, I would not expect to see more than 3 closes below the 50-day EMA. If we do, then we have a problem, but we will have our warning sign – hopefully positioning ourselves before any real damage is done.

During the 2003 bull market there were several tests of the 50-day EMA, and all of them held, although there were a couple of days below the EMA before the rally continued, which is why I say 3 or more closes below the EMA is the warning sign.

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

The NYSE overbought/oversold indicator has now clearly broken the 12-month long rising trend of high lows. Now we will see if the -500 oversold reading can hold as it has throughout this rally since March. A strong bull market can usually rally pretty easily off of the -500 to -1000 readings.

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

We talked about bonds and bond yields last week. While there was a break down in the yield of the 10-year T-note, we saw a little reversal day on Friday as yields dropped early but rallied strongly into the close.

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

The MACD indicator in the yield chart shows a very strong divergence. That is, while yields have been testing and eventually breaking below the 3.25% yield, the MACD has been rising. This could be a sign that the breakdown might be a fake out. I failed to mention this last week because I had not noticed the divergence in the MACD indicator on the 10-year yield.

The dollar did break above the declining resistance line suggesting that at least a short-term rally in the dollar could be in our future, but that 50-day EMA might be a tough nut to crack.

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

Just as the 50-day EMA should act as support in a bull market, it will act as resistance in a bear market and the dollar is certainly in a bear market at the moment. If the dollar does rebound, I’d expect the 200-day EMA to be the top target of any rally. That is, unless there is some major fundamental shift in our economic outlook.

What does all of this mean? We are at a point where we could be near a nice risk / reward buying point expecting at least a short-term (days to couple of weeks) rally. But if the moving averages start to give way and the technical picture starts to deteriorate, look for a more intermediate-term correction lasting a few weeks to a couple of months.

It’s never as easy as we’d like it to be but I think the game plan is pretty simple for me right now; I’ll be buying this dip unless the support starts to break.

The TSP Talk Sentiment Survey came in at 37% bulls, 50% bears for a 0.74 to 1 ratio, which keeps the system on a buy signal for this week.

Thanks for reading! We hope to see on TSP Talk.com.

Tom Crowley
TSP Talk