TSP Talk – Can the bulls keep it going?

Good morning. It’s your weekly dose of TSP Talk

Stocks opened to the downside on Friday after the jobs report was released, but once again the bulls managed to move the indices higher by the close. The TSP stock funds all ended the day in positive territory, and had another very successful week.

The market is certainly showing that it wants to go higher, but there are also many signs that the rally could run out of steam. A pullback here would not necessarily be a bad thing considering how quickly stocks have rallied, but will a pullback be benign consolidation, or could this recent rally prove to be nothing more than a bear market rally with another leg down still to come?

After the four week rally, the S&P 500 is clearly testing the top of the declining trading channel. This week could prove very interesting, particularly if the bulls are able to penetrate the resistance.

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

The Nasdaq has already broken higher and is now closing in on its 200-day moving average. This index is acting much better than the S&P 500 and can be considered the leader, so it is possible that the S&P will follow the path of the chart below. But first it (the S&P) must break through resistance.

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

As we mentioned last week, the TSP Talk Sentiment Survey came in at a 1.40 to 1 bulls (49%) to bears (35%) ratio, and that keeps that system on a sell signal for this week. The system is down 0.33% for 2009.

Last Monday we talked about the SentimenTrader.com Smart Money / Dumb Money Confidence indicator. Last week both the smart and dumb money were at 54. Since then, the smart money has moved down to 50, while the dumb money shot up to 63.

Chart provided courtesy of www.sentimentrader.com

Anything over 60 on the dumb money side can be a sign of overly optimistic or bullish sentiment and the market has slowed down during this bear market once this level has been reached in the past. Also during this bear market, the smart money has not been going much below the 50 level before the market starts to show signs of a peak.

The chart below is a piece of one of the many charts that Trader Fred posts in his premium service. It is not tied directly to his submodels that give the actual buy/sell signals, but it is interesting to watch as the market strength indicator (blue line) seems to precede the action of the S&P 500 (black line) by a few weeks – depending on how volatile the market is.

Earnings season officially kicks off this week with a report from Alcoa. Alcoa isn’t exactly a market mover, but once the higher profile companies start reporting this month and giving future earnings guidance, the market is likely to make a move. If investors are happy with the results, we could start to see a breakout in the S&P 500, and a test of the 200-day moving average. If however, the earnings are disappointing, we could start hearing talk of a test of the early March lows. How’s that for an important earnings season?

Thanks for reading. This market commentary is updated daily on www.TSPtalk.com.

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