TSP Talk – 05/19/12

Worst week of the year

The stock market and the TSP stock funds experienced a precipitous decline last week with barely a notice of any kind of relief rally. The buyers have gone on vacation apparently, while the trouble in Europe dictates the action.

Here are the TSP fund returns for the week of May 14 through 18.

The S&P 500 has broken down through any and all of the support levels, like a hot knife through butter. The head and shoulders pattern had already broken through the neckline and actually hit its initial downside target, which was near 1300. The 50-day EMA had already been taken out, and surely the 200-day EMA would hold on its first test – but no. So far no relief from the 200-day EMA.

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

Being down 6 days in a row, 8 of the last 9 days, and 11 of the last 13, it is not surprise that the indicators are oversold and giving extremely bullish readings, at least for the short-term. This chart from sentimenTrader.com shows that out of all of the indicators they follow, 29% are showing extremely bullish readings while just 1% are extremely bearish.

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

Going back to November of last year, we only saw a bearish percentage this low twice, both in 2011, and both times the market was at or near a low.

One word of caution: Market crashes don’t usually start near market highs. They tend to come after the market has already shown a lot of weakness, like we have been seeing, and those still in stocks become unable to handle the losses. Panic sets in and you get a “sell at any cost, just get me out” mentality, and the losses can be brutal.

Fortunately, after that kind of an emotional, panic selling, the market is void of sellers since anyone who was going to sell, probably already did. It’s called capitulation and that usually results in a sharp relief rally. I don’t know if that is what is going to happen this time, but be aware that panic selling is not usually a good strategy. Crashes are rare but selling during one is not the way to go. If you are still in stocks and are thinking of selling, it would be better to now before any panic. Better yet, the odds favor a rebound, so if we do start seeing panic selling we are probably closer to a bottom and a rally. Those on the sidelines with cash might be on the lookout for any panic selling. Buying panic selling is usually a good way to catch a quick, strong relief rally.

Good luck, and thanks for reading. We will be back here next week with another TSP Wrap Up.

Tom Crowley
Weekly Wrap-Ups Archive
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The legal stuff: This information is for educational purposes only! This is not advice or are commendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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