TSP Talk – Busy Week Ahead for the Market

Good morning govloop.com members. It’s our Monday morning market commentary from TSP Talk.com.

Stocks opened up deep in the red on Friday, but once again the market reversed and closed modestly higher. Does that mean another Monday morning rally? Maybe, but we have a busy week on tap and I expect we will see some volatile news generated swings.

The market started down on Friday after the Senate could not pass a bailout plan for the auto industry. Later in the day, President Bush talked about possibly using TARP money to help, and the market seemed to embrace that suggestion. Despite that, I’m not so sure the market will automatically jump all over a finalized bailout package, ala the selloff after both the failed, and eventually successful passing, of the financial industry bailout package.

That should keep things hopping this week. It also happens to be an options expiration week, which has a positive bias, but can also be volatile. If that’s not enough, tomorrow (Tuesday) there is an FOMC meeting and the Fed will tell us what they plan to do with interest rates. So yes, it will be an exciting week, if nothing else.

The recent rally in the S&P 500 may look good from a – Hey, we just had a 24% rally – standpoint, but the charts are telling another story. We are in an obvious intermediate to long-term downtrend, and the rally may have already hit the wall.

Within the downtrend, a rising wedge pattern has been formed, and they generally end in a break to the downside. I believe the only question will be, how long can the S&P 500 stay in the rising wedge before it breaks?

Chart provided courtesy of www.decisionpoint.com

Perhaps the rally will continue based on the Santa Claus rally theory, but the fact that we just had a 24% move from recent low to high, may mean we have had the S.C. rally already.

I sure wish I was smart enough to catch some of that rally, ala the Ebbchart System which made 13% since early November, but I chickened out and remained defensive for the most part. As they say, you have to take on risk in order to get the rewards. But I think the rally may be close to over, if it isn’t already.

I showed you the below indicators last Monday, and they showed the market as being a little stretched to the upside, meaning the rally could run out of steam, which it did as the week’s high (918) was actually made on Monday last week. Now these indicators have turned downward, except for the VTO indicator which is now at levels which also tends to stall a rally.

Chart provided courtesy of www.decisionpoint.com

Let’s revisit the Rydex Cash Flow Ratio, which is a measure of where the “dumb money” is putting their money. This indicators tells us what they are actually doing with their money, as opposed to a survey which tells us what they “say” they are doing with their money.

Chart provided courtesy of www.decisionpoint.com

In November we looked at this and to our surprise (or at least to my surprise) the “dumb money” was actually getting more aggressive – putting money into mutual funds that look for a rise in stock prices, as opposed to putting it in cash or in bearish funds (which make money when stocks go down). The indicator dipped temporarily but it is back near highs, meaning they, the dumb money, are being very complacent again. This is not usually a good sign in a bear market.

After a bullish reversal on a Friday afternoon, you could expect a little buying to start the day today. But at the moment (Sunday night, 10:30 PM ET ) the futures aren’t indicating too much of anything as the S&P and Nasdaq futures are just up a couple of points. It will be an interesting week and with the Fed on tap tomorrow, trading may be light today.

That’s all for today. Thanks for reading. If you have any questions, please let me know. Our market commentary is updated daily on www.tsptalk.com.

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