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Market Comments

February 28, 2011

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Today's Commentary

The technical picture improves

Stocks rallied on Friday, following through on Thursday's positive reversal day. The Dow gained 62-points on the day, but the broader indexes did even better - particularly the small caps.

For the TSP, the C-fund gained 1.08% on Friday, the S-fund jumped 2.13%, the I-fund added 0.97%, and the F-fund (bonds) picked up 0.09%. For more on the weekly and monthly returns, please see our TSP Weekly Wrap-up.

So far we have a classic looking pullback reversal but the light volume on Friday has some concerned. The old support line, which was broken last week, could act as resistance now. On the positive side, that resistance line is moving upward, and the S&P 500 is back above all three major exponential moving averages (20-day, 50-day, and 200-day.)

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

I'm not seeing too many negatives, but obviously people are still a little nervous after the recent sharp sell-off. I'm not concerned about their bearishness, but I will be concerned if the S&P 500 does not make a move toward new highs this week. If this is just one of those "dead cat bounces" the market will not give us much follow-thru this week, so we should know soon enough.

The market leader Dow Transportation Index had fallen very sharply last week when the price of oil shot up. And, as I write this late Sunday night, the price of oil is up again and it is flirting with $100 a barrel.

This chart isn't very bullish with the tepid rebound giving a hint of a possible bear flag, and the 50-day EMA could act as resistance. This is likely 100% related to the price of oil but you hate to see a market leader lag like this.


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

On the bright side the small caps, also leaders, rebounded very nicely off of the 50-day EMA and the Russell 2000 index is within a stone's throw of a new high.


                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
In this weekend's TSP Weekly Wrap-up, I also talked about the AAII Investor Sentiment Survey's jump in bearishness. I won't repeat it here, but basically the 1 to 1 bulls to bears ratio is a good sign for stocks in this bull market.

Our TSP Talk Sentiment Survey came in at 38% bulls 52% bears for a 0.73 to 1 bulls to bears ratio and another buy signal, so the system's allocation remains 100% S-Fund for this week.

We get the February jobs report at the end of the week, as well as a possible partial shut down in the federal government. With the unrest in the Middle East still raging, we have a recipe for continued volatile action in stocks and bonds.

Tomorrow starts March trading and historically March is above average, but not great. The top chart is old data but it does span 56-years.



                               Chart provided courtesy of www.sentimentrader.com

It's interesting to note the returns of the S&P 500 on the first trading day of the month over the last three months.

December: +2.16%
January: +1.13%
February: +1.67%
March: ??

Thanks for reading! We'll see you tomorrow.

Tom Crowley
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