Stocks rose sharply Friday morning following a stronger than expected GDP report.  This would appear to be good news, hence the early 120-point gain, but the rally quickly fizzed and by the close, the Dow was down 53-points.

      

The TSP stock funds slipped another 1% or so, while the F-fund picked up 0.24%.  It was a bad week, and the month of January did not fair as well as it started.  For more on the weekly and monthly returns, see the TSP Weekly Wrap-up.

Whether you are a market timer or a buy and hold investor, the recent action in the market probably has your attention.  I have to admit that my nerves are starting to show, but I don't invest based on my feelings so I have to look elsewhere for clues. 

The recent action has done damage to the technical picture and running for the sidelines is a serious option at this time.  I don't think anyone would fault you for that as capital preservations is one of the most important aspects to market timing.  The only way to beat the market averages is to be out when they are going down. 

In a bull market, you generally want to be a buyer of market dips.  During bear markets, you want to be a seller of rallies.  Some investors believe we are in a bull market, and by most definitions we are.  Some say we are just finishing up a rebound in the longer-term bear market.  The type of investor you are will now determine how you are going to react to what is currently going on. 

Let's look back at some old charts to make some points.  From 2005 until the end of 2007, the market was in a bull market.  We saw periodic breaks in the 50 and 200-day EMA, but they were short and the market rebounded rather quickly after they were penetrated. 

I decided to use an even longer EMA (350-day) to better illustrate the trend.  It wasn't until early 2008 that the S&P 500 penetrated the 350-day EMA to the downside, for any length of time.  That was one of the main clues that things had changed. 

The S&P 500 stayed below that average until the late summer of 2009. 


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

I had missed out on a lot of gains in early 2009, waiting for this type of sign, but once we saw the 50-day EMA cross above the 200-day, which happened to be about the same time as the S&P moved above the 350-day EMA, I started to get more aggressive in my buying. 

Sure there were tremendous shorter-term trading opportunities within these larger moves, but the major trend is the key to whether our attitude is one of buying of dips, or selling of rallies.

It is a scary time right now, but if you step back and take a look at the charts in a less emotional way - that is, not watching the day to day point totals - the S&P is still trading above the 200-day and 350-day EMA.  Nothing to panic about yet - but we're getting close.  The bad news is, if we do fall below those averages, our accounts will go down with it, assuming you are currently invested.  The good news is, the S&P 500 is only about 2% or so from those EMA's so we may get our answers rather quickly.  We are either at a great buying opportunity, or we should be prepared to bail if things do not start improving quickly.

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

The safe route might be to step aside and watch how it plays out before committing.  Selling rallies could be a smart move here, because the support the S&P is falling through could act as resistance on any rebounds.  And an oversold rally, even if short-lived, is a good possibility at this point.  How the market reacts to this resistance during rallies may be the tell we need.


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

As we talked about last week, we are seeing some extremes in sentiment (on the bearish side), which can be bullish for the market - that is, unless we are seeing a change in character in the market.

The 0.89 to 1 bulls to bears ratio last week is the second buy signal in a row for the survey system and during the bull market, that was big buy flag, as you can see in the chart below, which shows the sentiment from August 2009 until the present (after the S&P 500 went above the 350-day EMA).

The problem is, if we are seeing the beginning of anther bear market leg, that changes everything.  During the 2008 bear market, we saw low ratio buy signals almost every week in the system as the sentiment was obviously much more bearish during that period.  This double buy signal strategy did not work at all in 2008.



The bottom line is, we don't know if this market is going to officially (based on moving averages) move back into a bear market, so we don't know exactly how to play it.  You may want to put your defense on the field until you know more, but if the bull market is going to stick around, this is the place to be a buyer. 

The strong GDP number we got on Friday is a good sign, but some experts are not overly excited about it.  This Friday we get the January jobs report and perhaps it will help determine the economic conditions, and eventually which way this market might be breaking.   

Thanks for reading.  We'll see you back here tomorrow.

Tom Crowley

If anyone is interested, I set up a fundraiser at MercyCorps for the victims of the Haiti earthquake.  I always feel so helpless in times like these so rather than just giving a few bucks, I thought I would do something a little more by providing a vehicle for our readers to help also.  It looks like a terrible situation, so if we can spare a couple of bucks, it will add up.  It is a quick and painless process.  Thanks!

                                  

Update 01/24/10:
Despite the obstacles, our response team is getting aid to earthquake survivors in Haiti -- thanks to your financial support.

Here's the latest news from our field teams:

• At Port-au-Prince's overwhelmed General Hospital we're restocking the kitchen with enough staple foods -- flour, oil, salt and more -- to feed patients, staff and family members for two weeks. We're also working with UNICEF to deliver hygiene kits, nutritional supplements and toys to mothers and children.
   
• We're delivering high-energy biscuits to 600 patients and family members at a second beleaguered hospital.
   
• We're pressing forward with plans to improve water supply in heavily affected areas of town, train caregivers on how to treat quake-related trauma in kids, and pay residents to clear rubble from neighborhoods.

From MercyCorps: Over the last five years, we've allocated more than 89% of our resources directly to programs. America's premier charity evaluator gives Mercy Corps four stars in organizational efficiency. Click here to learn more.

Mercy Corps is a 501(c)3 charity. Your gift is tax-deductible as allowed by U.S. law.