Sell-off

The market was spooked on Friday by a double dose of negative news - one economic, and one geopolitical.  By the close, the Dow had lost 166-points, and the other major U.S. indices gave up somewhere between 1.5% and 3%.

For the TSP, the C-fund fell 1.78% on Friday, the S-fund lost 2.15%, the I-fund dropped 1.82%, and the F-fund (bonds) gained 0.18%.  For more on the weekly and monthly returns, please see our TSP Weekly Wrap-up.  

The GDP report came in lower than expected, and of course the mass protests going on in Cairo, Egypt, caused some minor panic on Wall Street.  It was enough to send our market reeling as the S&P 500 closed convincingly below its rising trendline for the first time in two months. 
                         
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

This action reminds me a lot of the 2006-2007 market, which we have talked about several times over the last couple of months.

The rally in 2006 and into 2007 was similar to the recent action we had seen, with a relentless ascending trend that has taken few breaks.  In February 2007, China's Shanghai Index crashed 10% in one day.  Investors in the U.S. didn't know exactly how to handle it so they did what most people do in uncertain times.  They sold. 
                            
 
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The decline was sharp and quick, but after about 2 weeks of choppy action after the crash, the rally resumes.

After the rally we've had, this uncertain geopolitical situation gave investors a reason to take profits in market that had not seen a 1% decline in nearly 3 months.  The questions of how these protests in Cairo play out and effect the Suez Canal, a main artery for oil transportation and world trade, was enough to cause the sell-off.  

The market did something on Friday that it has only done 8 other times since 1928.  The S&P 500 made a fresh 52-week high one day, then collapsed to a 10-day low the next.  Per Sentimentrader.com:

"The index's most consistent performance in the weeks ahead was 26 days later, when it was up 1 time and down 7 times. It suffered an additional loss of about 4% on average during that time. Perhaps most importantly, it took a median of 58 days to climb back enough to close at a new 52-week high. None of them were able to get a new high in anything shorter than 32 trading days, and three of them took 2 years or more to get there."


                                           Data provided courtesy of www.sentimentrader.com

Will it be different this time?  Well, we are in bull market complete with low interest rates, good earnings, and QE2 like liquidity.  It going to be tough to keep this market down for long.  In bull markets we buy the dips until the charts tell us otherwise.  So far this one-day pullback gives me no reason to get concerned, but a short-term consolidation is certainly possible.  Markets don't go straight up, or down.

The TSP is starting the L-2050 fund tomorrow, which means you can make an Interfund Transfer this morning if you want to be in the new fund tomorrow - assuming you have an IFT left for January.  See www.tsp.gov for more information on the L-2050 fund.

Our TSP Talk Sentiment Survey came in at 53% bulls, 32% bears for a 1.66 to 1 bulls to bears ratio.  That is a neutral reading and so the system remains in the S-fund for this week.  As always, thanks for taking the survey each week!

Administrative Note:  Today is the last day for free access to our new Premium Service -  Interpid Timer's Investment Strategies.  Tomorrow you will need to have a subscription to gain access.

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Thanks for reading!  We'll see you tomorrow.

Tom Crowley