Follow-through

Stocks rallied again yesterday, this time with a little more conviction although volume was only average.  The Dow gained 148-points on the day; regaining all of the losses from Friday, and then some.

For the TSP, the C-fund gained 1.67% yesterday, the S-fund gained 1.83%, the I-fund jumped 2.28%, and the F-fund (bonds) lost 0.23%. 

I mentioned volume being light because when you see a rally this strong, you want to see some participation.  The fact that it was only average could mean a couple things:  One could be that money managers are not joining in, and that could be a warning sign if true, because rallies don't last long if they don't join in. 

The other thing could be that folks like us, who aren't as savvy, are still nervous about jumping into a market that plummeted last week after a news event.  That would be a bullish sign because they usually lag the action.

The S&P 500 made a new high again, and it appears the ascending trend is back on track.  As we had been saying, extended markets can drop with a thud on bad news, but the rally and trend usually resume quickly in a strong bull market.  

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

This market is about as strong as they come but the recent volatility could be another warning sign despite the new highs.

For one thing, our three market leaders, the Dow Transports, the Nasdaq, and the small caps, have not made new high as the Dow and S&P 500 have.

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

That's not a major concern, but a trend we should continue to watch.

The dumb money of the put / call ratios show that they indeed became bearish last week.  The CBOE reading is as low (bearish) as it was before the December rally started.  Of course, the more bearish they are, the more bullish it is for stocks.  It's not exactly an extreme reading, but relative to recent action it is.
                         
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The dollar's breakdown continues.  This helps assets sold in dollars but in particular the I-fund which is already up 4.74% in 2011.

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

The volatility can be a sign of topping action and that makes it even more important for the rising trend to hold.  Should the market continue to put in 1% or more up and down days, we may want to get a little more cautious.  I'd rather see the slow steady rally.  Trader Fred talks about this a lot with his Market Strength / Weakness Charts.

Thanks for reading!  We'll see you tomorrow.

Tom Crowley