TSP Talk – 6/02/12

Last week was a holiday shortened week and we went into Friday with just minor losses in the stock market, but as you may have heard, the May jobs report came in well below expectation and stocks sold off sharply. If you missed it, estimates were looking for an increase of 150,000 jobs and we got less than half of that, plus the unemployment rate ticked up to 8.2%.

Here are the TSP fund returns for the week of May 21 through 25.

And here are the final returns for May…

The emotional selling after a jobs report is tough to judge. Many times the market reverses the week after a big reaction to the report, but the economic data has been troublesome lately and of course there is still a mess in Europe, so investors may wait for a reason to buy rather than blindly go in and try to pick up bargains. That said, buying when things seem terrible is tough to do, but many times it pays off.

This chart of the S&P 500 shows that we are clearly in a new downtrend, but many of the indicators remain in extremely oversold conditions. A snap-back rally early this week is very possible, but with the S&P now trading below both the 200-day moving averages, we could see a lot of traders selling the rallies.

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

Market crashes are rare but they are more likely to to manifest from a poor market that has already broken down, such as the current environment. Counting on a crash is tough since they are so rare, and it’s more likely that the market rallies from these oversold conditions, but there always that negative outside chance of something sinister happening.

Here are prior times, going back nearly 100 years, when the S&P 500 fell sharply and penetrated below the the 200-day simple moving average for the first time in 3-months.

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

You can see that the returns are very volatile, with some up and some down. Going out one month or longer there is a lot more green than red, but the losses were pretty steep when it happened.

Our friends at sentimenTrader.com says, “Since 1950, there have been 12 occurrences like this. Over the next three months, the S&P was positive 10 of those times. The exceptions were the crash in ’87 and a tiny loss in August 2011 (though it wasn’t so tiny at first). A loss of support always raises the risk of quick panic selling. That could turn into a once-in-a-decade kind of rout, but historically a better bet would be that any short-term weakness would quickly be made up.”

So, if you want to take your chances, the odds are pretty good that we get some kind of rally, but if we’re wrong the downside could be very harsh. Here’s where your tolerance for risk should be evaluated.

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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