TSP Talk: Just a pullback in stocks, or more? Looking for clues

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

Stocks struggled on Friday as the Dow lost 63-points, and the C and S funds dropped about 1% each. At this point, a pullback is healthy, but will people be overly complacent and blindsided by something more severe? Let’s look for clues.

The S&P 500 did finally break out (to the down side) of that long tight ascending trading range. It is still holding onto the 20-day moving average, which is above the 50-day moving average – which are both good signs. The bad news is that the S&P remains under the 200-day moving average, as is the 50-day moving average, which technically leaves this market in bear mode.

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

That doesn’t necessarily mean that the market will not go higher, but as a chart reader I have to assume the bear market will continue – until it’s officially over. When will that be? I’d say when the S&P 500 and its 50-day moving average are both above the 200-day moving average.

You’re probably thinking – waiting that long will have you missing most of the bull run. In late 2007, the S&P 500 dropped below the 200-day moving average a couple of times, and the 50-day moving average eventually crossed below the 200-day moving average in January of 2008, putting us into a technical bear market while the S&P 500 was still over 1400. That gave you plenty of time to be a seller, so I assume we will have plenty to buy when the bull market signals present themselves.

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

The NYSE overbought/oversold indicator finally broke out of that pennant / wedge formation after being in overbought territory for a couple of months. I don’t know how it will play out this time but we saw similar breaks in the last couple of years turn out to be points of market peaks.

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

I am following the bond market and the price of gold to see what might be lurking underneath this recent pullback in stocks. Like I said, a pullback in stocks after the recent run up is quite healthy. Markets don’t usually go straight up or straight down. But is there more to this pullback?

Looking at the yields of the 10-year T-Note (which moves in the opposite direction of the price of bonds and the F-fund) and we see that there was a peak early in May. This is also nothing unusual after the recent rally in yields since mid-March. It is now flirting with the 200-day moving average and is actually near some pretty strong support. This looks good for yields and bad for bonds. If, however, the yield drops below that support (currently near 3.0% to 3.05%) bond prices and the F-fund could rally.

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

Why would bonds rally when many “experts” believe yields should be moving higher (thus bond prices go lower)? Mostly for safety. If stocks do continue to sell-off, bonds could be the beneficiary and we could see a rally (yields moving lower). This is speculation of course, but there are signs that this could happen.

The price of gold is another indication of where investor’s think stocks could be going. We know that the dollar has been falling and that helps the price of gold because it is a hedge against inflation, but gold is also a place that investors throw money when looking for safety.

There is a very definite head and shoulders pattern (H&S) forming on the weekly gold chart, and it seems to be indicating that gold is heading toward 1000 again. And, if 1000 is broken on the upside, we could be looking at an initial target of 1200 to 1300 based on the H&S pattern.

LS = Left Shoulder. RS = Right Shoulder…

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

The charts and or indicators could change and we’d have to rethink the analysis, but I think the above clues continue to tell us to play defense. If you made some good money over the last two months than you were smarter than I was, but again, it may be time to play defense.

Thanks for reading! The TSP Talk market commentary is updated daily on www.tsptalk.com.

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Barry Everett

Wow, thanks for the detailed analysis. I’m still looking at the March 8th bottom, in the mud and weeds. I’ve snuck back in some from my pre-drop move to cash, and at this time will ride the gentle slope of long term growth, trying my best to ignore the peaks and valleys of arm flapping day traders and cable finatics (sic). 😉

Tom Crowley

Good for you Barry. Volatility will be picking up in my opinion, so it is good to see that you have a plan and it will be important that you stick with it as emotions run high when things get wild. I’m still not convinced the worst is over, but dollar cost averaging into stocks now is not a bad way to play this if you have cash on hand. That said, I’m waiting a little longer.

Good luck!