TSP Talk – Who is Being Trapped, the Bulls or Bears?

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

A quick shout out to our amazing military and government agencies, in particular the US Navy special forces, who were involved in defusing what appeared to be an impossible situation with the Somali pirates. The rescue was nothing short of extraordinary. I believe I can speak for our fellow TSP participants by saying thank you! I think we all woke up this morning with an extra sense of pride for our great country. Congratulations and thank you for a job well done!

On Thursday morning I had said I was expecting a big move one way or the other, but I was also expecting a low volume slightly positive pre-holiday bias to end the week. What I wasn’t expecting was a high volume rally, but after some positive guidance from Wells Fargo it seemed the bulls did not want to be left behind. The indices roared higher to the tune of 4% to 5%. So, this must mean that the bear market is over, right?

The investment world is still torn over the question of whether this strong rally is an indication that the bear market is over, or if it is just a bear market rally that is eventually going to come to a crashing end.

I hate the fact that I was not able to take advantage of this rally, and it may have more to go, but I have still not seen any evidence that the bear market is over.

The 20-day moving average crossing above the 50-day moving average is a good sign, but until the 50-day moving average crosses above the 200-day moving average, I will continue to consider this a bear market rally.

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

The consequence of being wrong in this situation, is missing the first move higher, which could be significant, although there should be pullbacks that can be bought. The reward for being right – by staying defensive until there is confirmation – is protecting your account. Of course if you were able to pick up some of the large gains that we have seen over the last several weeks, you have some gains to work with and can be more patient.

Let’s take a look at some of the action from the 2000-2002 bear market:

In May of 2001 (see chart below), stocks had rallied almost 25% from the lows made two-months earlier. Some of the daily rallies were explosive as we have also seen lately, and the S&P actually made a move above the 200-day moving average. There was a breakout above the declining trendline and certainly the bears felt as if they may be missing the boat.

There were tremendous gains to be had, but like today, the 50-day moving average never did cross above the 200-day moving average. The rally eventually ran out of steam, and the bear market continued with a vengence.

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

After another huge rally at the end of 2001, we saw a similar push above resistance and the 200-day moving average to start 2002. The market actually consolidated nicely from December of 2001 until the spring of 2002, things were looking up, the bulls were very optimistic, and then…

… the bear took control again.

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

If we take a look at the market action during The Great Depression, and the many bear market rallies that occurred during the three year decline, you can see that the current rally is not anything out of the ordinary for a bear market.

Chart source: www.zealllc.com

“…there were six major false bottoms after 1929 in the DJIA each followed by an average bear market rally of 29.3%. Investors who “bought for the long haul” in any one of these six great rallies were mercilessly slaughtered and did not make their capital back for many years into the future. Indiscriminately buying into the top half of a bear market rally is a surefire way to quickly and efficiently destroy your capital!” From www.zealllc.com

So, the bears may feel as if they are being left behind and are trapped because they don’t want to chase this strong rally at this point, but we have not had any confirmation yet. Those who made money on the long (buy) side may want to consider a defensive plan to protect their gains, just in case this bear market is not over.

Our TSP Talk Sentiment Survey came in at bulls (35%) to bears (47%) for a bulls to bears ratio was 0.74 to 1. That is a neutral reading and keeps the system on a sell signal for this week.

That’s all I have for today. Thanks for reading!

Tom Crowley

This market commentary is update daily on www.tsptalk.com.

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Great note. It really is hard to know with the false bottoms. But the Goldman earnings today at least continue to offer hope.