Stocks pulled back yesterday, and while no one really expected a straight shot to the upside after the recent correction, these pullbacks while investors are still on edge can be unnerving. We are seeing the open gaps trying to get filled and we could even see a test of the lows from earlier in the month. It's all normal action, although there's always the possibility of another leg down so the bulls aren't comfortable, but the bears are still on edge after the quick 5% snap back rally.
The correction was the real deal - a 10% decline off the highs and again, some see it as opportunity, and others as just the start of the decline, so we have our base case of investor sentiment, but the ones who are easily swayed, or who go whichever way the wind blows, are the ones who push sentiment indicators to and off extremes and extreme readings tend to give the opportunities.
The market is going to try to weed out the weaker holding bulls from the outright bulls, to the full blown bears. Some people hate the tariffs, the trajectory of the economy, or think the new administration is tanking the financial system, while others are seeing a great buying opportunity and blue skies ahead for market.
The relief rally has taken some of those sentiment indicators well off their worst levels, so they have basically done their job. That is, the extreme bearishness meant theoretically, there weren't a whole lot of people left to sell.
Now that we've seen a 5% snap back rally, bearishness subsided and that meant many of those weaker bulls did some buying and sentiment is softening toward the bulls again and that gave the bears an opportunity to push on the downside again.
This is what is playing out now. And what the bulls do from here will give us the answer. If backing and filling in the open gap from Monday, or retesting the 200-day EMA are seen as a buying opportunities to some who may have missed that rally, they could start the process over again and refuel the calls for a bottom. Another possibility is them waiting for the lows to get tested so they can feel good about buying the lows.
But if the buying goes quiet after filling in the gaps, testing the moving averages, or even at the prior lows, down we will go again. OK, so that's obvious and it's easier to point out the possibilities than tell you what's actually going to happen.
With the inflation data coming on Friday, the tariffs starting Wednesday of next week, another jobs report at the end of next week, plus the start of the 1st quarter earnings season getting underway, the next several trading days may be crucial to this current pivot point.
The S&P 500 (C-fund) has filled in a portion of its open gap. It came down enough to test, but close above, it's 200-day EMA. These are not atypical moves after a pullback. Nor is a pause in the rebound once the PMO indicator crosses back above its moving average, as it is a sign of being short-term overbought. But right now I'd say this is normal, healthy bottoming action. If after today's close, the S&P 500 is below 5650 to 5600, then it may become a problem.
Notice that the Fed isn't even a big part of the mix right now. Interest rates have stabilized and we are more likely to see 2 or 3 rate cuts before the end of the year, as opposed to a Fed that's getting in the way. That is unless inflation gets hot again. There has been some concerning data, but nothing overly serious yet.
The price of copper and lumber are making new highs this month and that can either be a sign of inflation, or of an economy that is doing just fine and needing resources.
Same for some other economically sensitive charts like bond yields, which have been rising, and that's a possible sign of economic strength (or perhaps inflation.) The same for the price of oil (USO chart) which is back above some key moving averages. Inflation, or economic demand?
And then we have the Dow Transportation Index, which led the entire market to the downside, but yesterday it was up when the rest of the market was down. Was it a one day blip, or is it trying to tell us something bullish about this bottoming action?
I do see bear flags on some of those charts so these could flip right back over and change everything, but for now it looks like a glimmer of hope for the economy.
Back to the seasonality chart for March. This time of March is usually pretty good except one big red day, and that may have been yesterday. Yesterday, being the 26th, was supposed to be the big up day with today (27th) historically the give back day. Did those days reverse this year?
Chart provided courtesy of www.sentimentrader.com
Volatility is still with us and that makes for a vulnerable market, but it also can set up buying opportunities. We can only wait and see if yesterday was one of those opportunities for those who missed the rally off the lows.
We'll get the PCE Prices and Personal Income reports on Friday and they could be market movers.
The DWCPF (S-fund) had a rough day as it partially filled in its open gap from Monday, and it did fall below that 300-day average, however it was able to close above it. I would say that the "V" bottom is still alive, but we can see where it could easily fail with anymore downside.
The ACWX (I-fund) fell with US stocks as the dollar seems to be on a mission to fill in one of its overhead open gaps.
This I-fund chart is flirting with some serious support. There are open gaps near 55.75 and the 50-day average is near 55.50. All legitimate targets, but a close below the blue support line could open the door to a leg down with more serious losses.
BND (F-fund) gave up Tuesday's gains and added some losses as the rally in yields on the strong durable good report has this chart also testing some longer-term rising support. If the bear flag on the 10-year yield (chart is in the top section) breaks down, as bear flags tend to do, this BND chart would be OK. The open gap and 50-day EMA are there for the testing.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
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The correction was the real deal - a 10% decline off the highs and again, some see it as opportunity, and others as just the start of the decline, so we have our base case of investor sentiment, but the ones who are easily swayed, or who go whichever way the wind blows, are the ones who push sentiment indicators to and off extremes and extreme readings tend to give the opportunities.
The market is going to try to weed out the weaker holding bulls from the outright bulls, to the full blown bears. Some people hate the tariffs, the trajectory of the economy, or think the new administration is tanking the financial system, while others are seeing a great buying opportunity and blue skies ahead for market.
The relief rally has taken some of those sentiment indicators well off their worst levels, so they have basically done their job. That is, the extreme bearishness meant theoretically, there weren't a whole lot of people left to sell.
Now that we've seen a 5% snap back rally, bearishness subsided and that meant many of those weaker bulls did some buying and sentiment is softening toward the bulls again and that gave the bears an opportunity to push on the downside again.
This is what is playing out now. And what the bulls do from here will give us the answer. If backing and filling in the open gap from Monday, or retesting the 200-day EMA are seen as a buying opportunities to some who may have missed that rally, they could start the process over again and refuel the calls for a bottom. Another possibility is them waiting for the lows to get tested so they can feel good about buying the lows.
But if the buying goes quiet after filling in the gaps, testing the moving averages, or even at the prior lows, down we will go again. OK, so that's obvious and it's easier to point out the possibilities than tell you what's actually going to happen.
With the inflation data coming on Friday, the tariffs starting Wednesday of next week, another jobs report at the end of next week, plus the start of the 1st quarter earnings season getting underway, the next several trading days may be crucial to this current pivot point.
The S&P 500 (C-fund) has filled in a portion of its open gap. It came down enough to test, but close above, it's 200-day EMA. These are not atypical moves after a pullback. Nor is a pause in the rebound once the PMO indicator crosses back above its moving average, as it is a sign of being short-term overbought. But right now I'd say this is normal, healthy bottoming action. If after today's close, the S&P 500 is below 5650 to 5600, then it may become a problem.
Notice that the Fed isn't even a big part of the mix right now. Interest rates have stabilized and we are more likely to see 2 or 3 rate cuts before the end of the year, as opposed to a Fed that's getting in the way. That is unless inflation gets hot again. There has been some concerning data, but nothing overly serious yet.
The price of copper and lumber are making new highs this month and that can either be a sign of inflation, or of an economy that is doing just fine and needing resources.
Same for some other economically sensitive charts like bond yields, which have been rising, and that's a possible sign of economic strength (or perhaps inflation.) The same for the price of oil (USO chart) which is back above some key moving averages. Inflation, or economic demand?
And then we have the Dow Transportation Index, which led the entire market to the downside, but yesterday it was up when the rest of the market was down. Was it a one day blip, or is it trying to tell us something bullish about this bottoming action?
I do see bear flags on some of those charts so these could flip right back over and change everything, but for now it looks like a glimmer of hope for the economy.
Back to the seasonality chart for March. This time of March is usually pretty good except one big red day, and that may have been yesterday. Yesterday, being the 26th, was supposed to be the big up day with today (27th) historically the give back day. Did those days reverse this year?
Chart provided courtesy of www.sentimentrader.com
Volatility is still with us and that makes for a vulnerable market, but it also can set up buying opportunities. We can only wait and see if yesterday was one of those opportunities for those who missed the rally off the lows.
We'll get the PCE Prices and Personal Income reports on Friday and they could be market movers.
The DWCPF (S-fund) had a rough day as it partially filled in its open gap from Monday, and it did fall below that 300-day average, however it was able to close above it. I would say that the "V" bottom is still alive, but we can see where it could easily fail with anymore downside.
The ACWX (I-fund) fell with US stocks as the dollar seems to be on a mission to fill in one of its overhead open gaps.
This I-fund chart is flirting with some serious support. There are open gaps near 55.75 and the 50-day average is near 55.50. All legitimate targets, but a close below the blue support line could open the door to a leg down with more serious losses.
BND (F-fund) gave up Tuesday's gains and added some losses as the rally in yields on the strong durable good report has this chart also testing some longer-term rising support. If the bear flag on the 10-year yield (chart is in the top section) breaks down, as bear flags tend to do, this BND chart would be OK. The open gap and 50-day EMA are there for the testing.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Questions, comments, or issues with today's commentary? We can discuss it in the Forum.
Daily Market Commentary Archives
For more info our other premium services, please go here... www.tsptalk.com/premiums.php
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We may use additional methods and strategies to determine fund positions.
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