Buy the pullback or prepare for a correction?
Stocks lost ground last week giving the TSP stock funds a little haircut after the big gains during the first week in November. For the week, the C-fund lost 2.10%, the S-fund fell 2.00%, and the I-fund gave up 2.30%. Bonds (F-fund) were also down losing 0.79%, and the G-fund picked up 0.04%.
Because of that strong first week in November, the stocks funds are all still higher for month. The C-fund is up 1.46% in November, the S-fund is up 2.08%, and the I-fund is holding onto a 1.08% gain. The F-fund is down for the month at -0.50%, and the G-fund is up 0.07%.
I marked up the S&P 500 chart with several support and resistance areas below, to show the market’s coming challenges. After breaking above the April highs in the first week of November, the S&P could not hold onto that level and has now pulled back near some key support areas. Should the market continue its recent trend higher, this would be the perfect spot to buy. But that is the big question.
The area marked “A” below is where the 20-day exponential moving average (EMA) meets the lower end of the recent ascending trading channel. Both were broken on Friday but the S&P was able to close above the 20-day EMA. If the S&P can’t resume the upside action, then we want to look at more possible downside targets.
Point “B” is the top of the old trading channel, which was broken. Resistance, once broken, can act as support. Point “C” is the 50-day EMA and point “D” is where the 200-day EMA could meet the recent summer highs. All potential targets if this recent pullback turns into something more severe.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
One of my favorite indicators is going against extreme sentiment readings. When a good majority of investors start to become very bullish, it tends to be bearish for stocks, and vice versa. They are considered the “dumb money”, and guess what? You and I are part of that group.
The higher the reading, the more bullish the sentiment. The 67 reading in the chart below tells us that, the “dumb money” may have become a little too bullish, and that means stocks may need a break. Anything over 60 is getting into excess territory.
Chart provided courtesy of www.sentimentrader.com, analysis by TSP Talk
The other line on that chart is a compilation of “smart money” sentiment and they are down to 33. Anything below 40 is considered an extreme bearish reading and when the smart money is bearish, you want to pay attention.
In general, going against the dumb money and with the smart money, is the best strategy. Here is a longer-term view of this indicator by ratio. The higher the ratio, the more bullish the dumb money is compared to how bearish the smart money is. Other than an ineffective period in 2009, this indicator has been pretty good at warning us when trouble may be brewing. It is a not a perfect timing mechanism, but it is accurate enough to get my attention when we see readings above that red dashed line, or below the dashed green line. The blue dashed line is where we are now.
Chart provided courtesy of www.sentimentrader.com, analysis by TSP Talk
Last week we talked about the market being due for some kind of pullback, and we also warned that our TSP Talk Sentiment Survey System gave a sell signal for last week. The system is up over 26.6% in 2010 and remains on a sell signal for this coming week. That’s why I really like sentiment indicators. 🙂
Good luck, and thanks for reading. We will be back here next week with another TSP Wrap Up.
Tom Crowley
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