TSP Talk: The market strength surprises the bears

It’s your weekly dose of TSP Talk from www.tsptalk.com.

I’m not sure why, but I am having problems formatting these blogs lately. The fonts and spacing seems to have a mind of their own. What I see when I enter the text, is not what is showing when I publish it. So, I apologize if this blog post is formatted oddly.

Last week was a holiday shortened week, it was an options expiration week, which can be less than typical, and we saw the Fed raise the discount rate. The market took that combination and turned it into a great week for stocks.

For the week, the C-fund was up 3.19%, the S-fund gained 3.39%, and the I-fund lagged but still picked up 2.49%. The F-fund (bonds) slipped 0.27%, and the G-fund added 0.06%.

For February, the S-fund leads the way with a strong 5.26% gain, which is more than enough to put it into positive territory for 2010. The C-fund follows with a +3.49% return for the month, and the I-fund is up, but by just 0.33% mainly because of the continued strength in the dollar. Bonds are down 0.47% and the G-fund is up 0.16%.

Technically, the chart of the S&P 500 improved dramatically last week as it was able to break above the bearish bear flag pattern, which normally breaks down, and it was able to move back above both the 20 and 50-day exponential moving averages (EMA). If there are negatives, it was that volume was rather light on the recent rally, and the indicators are quite overbought.

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

Still, this is a great step in solidifying that the bounce off of the 200-day EMA was an intermediate low. The market’s strength has surprised me over the last several months, but sometimes you have to go with the trend, even if you are not a believer. The chart indicates that a test of the 1150 highs could be in the cards, but if we happen to see a move back below the 50-day EMA for some reason, it would be back to a more cautious stance.

One thing we have been noticing on TSP Talk is the extreme bearishness of our recent sentiment surveys going back to the end of January. When the bearish percentage and starts hitting 40% or more and / or the bulls to bears ratio is under 1.26 to 1 during a bull market (defined by us as when the S&P 500’s 50-day EMA is above the 200-day EMA) then you can expect at least a short-term rally.

By contrast, when the bearish percentage starts moving into the 20% area and / or the bulls to bears ratio moves over 2.0 to 1, then you can expect some sort of weakness to occur. Readings between 1.26 and 1.99 are considered neutral.

As I mentioned, this recent strength surprised me and I was caught being on the sidelines during last week’s rally. Now I am just looking to see if the market can hold that 50-day EMA. A pullback to it, but not below it might be the next good short-term buying opportunity, but if we see the trading go back below that EMA, be careful. That would be a warning sign.

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

Tom Crowley

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