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Market Comments

February 23, 2011

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Today's Commentary

Pullback or correction?

Stocks pulled back sharply yesterday after the price of oil spiked up on continued unrest in the Middle East. The Dow lost 178-points on the day and the carnage was widespread, particularly in the Nasdaq and Transportation Indexes.

For the TSP, the C-fund fell 2.05% yesterday, the S-fund dropped 2.60%, the I-fund lost 2.29%, and investors took a flight to safety as the F-fund (bonds) was up 0.48%.

The S&P 500 fell 2.1% and barely hung onto the 20-day EMA. The short-term rising trendline broke, that's one warning. If the 20-day EMA cannot hold, that will be #2 and would probably result in a test of the 50-day EMA - currently sitting at 1285.

The S&P dropped to a level of 120-points over the 200-day EMA. That's still high but it is 29-points less than Friday's close, where it was 149 points above.


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

Not to beat this to death, but again, negative news driven events during a bull market tend to act as buying opportunities rather quickly - as we saw in 2007. The question is: Was the spike up in the price of oil a temporary emotional move, or the start of something more long-term? That could determine how serious any pullback in stocks will be.

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

The price of oil (on the continuous contract price) rose nearly 7% yesterday. That was actually well off the day's high and it left a huge gap on the chart, which may look to get filled in the coming days.


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

Whether this is a temporary spike remains to be seen, but the fact that it closed well off the highs tells us that there was a lot of emotion priced in to yesterday's rally in oil.

Not surprisingly, the spike in oil prices had a very negative impact on the Dow Transportation Index. High oil prices translate into lower earnings for transportation stocks, and like a chain reaction, those higher costs are eventually passed onto the consumers.


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

So, not only will higher oil prices hit consumers in the wallet at the gas pumps, but the price of almost everything else is eventually affected by higher shipping costs.

It is interesting to see the Transports find support at the 50-day EMA and the longer-term ascending parallel trading channel. So what happens in the coming days is very important as far as the technical analysis picture goes.

The technology stocks of the Nasdaq were hit hard as well gapping down and falling through the 20-day EMA. One of the reasons is that the Nasdaq 100 doesn't have a lot of energy and commodity related stocks that may have helped the more broader indices outperform.



The Semiconductor Index saw similar action, and like the Transportation Index, both the Semi's and the Nasdaq 100 found support at the longer-term rising support lines - Pretty important levels.


The small caps of the Russell 2000 also had a rough day, but this index remained above the 20-day EMA. The technical picture still looks fine, but there is still room down below before the rising support line is tested.


                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Investors jumped into bonds for safety and that brought bond yields back down below the old breakout levels. This was not something I was expecting to see, but any time you put a scare into the stock market you see action like this. It is likely temporary - unless the economy is about to rollover again.


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

If the news out of the Middle East remains uncertain and volatile, this pullback could turn into a correction. We are in a bull market and you'd expect a bullish outcome, but if it turns into something more, the charts will tell us. If the S&P cannot hold onto the 20-day EMA I may move to 100% G fund (I currently have 40% G) just to get out of the way while a probably test of the 50-day EMA plays out.

But it could get tricky as far as timing goes. We could see a dead-cat bounce today, but follow-through would be important at that point. A rally after a sell-off can give us a feeling of false relief only to see the selling resume a day or more later. I will be watching the support levels very carefully.

Thanks for reading! We'll see you tomorrow.

Tom Crowley
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