Stocks opened higher and then exploded on Friday with some help of a very strong jobs report, and later some accommodating dovish comments from the Fed. We saw big gains across the board of an amazing 3% to 4%. Bonds were sold on the "risk on" play. The big Friday closed out a wild first week of the New Year, and took the indices into positive territory for the week and the year.
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If you believe in the January Indicator, where "how goes the first week in January, so goes January", and "how goes January, so goes the year", you may be excited by last week's action and 1% gain for the S&P 500 as far how this year will go. The problem is, over the last several years, the 1st 3 days of January have been a poor indicator of how the year will go. In fact the opposite was more true.
After the stronger than expected jobs report, the Fed gave the market some solace with a more dovish tone. Not only did they say future interest rates will be more data dependent, but they also said the quantitative tightening (QT) of the balance may be looked at as well. That's new.
The ironic part of this is that the jobs report was so strong and the Fed's reasoning for raising rates and QT was because of some overheated economic data. They may have set themselves up for a disappointment for investors if the data does heat up again and they have to become more hawkish again after they threw that bone to investors on Friday.
On Wednesday we'll get an interesting version of the FOMC meeting minutes. On Friday we heard the Fed with a more dovish tone, but these minutes reflect what they were thinking at their last meeting when Jerome Powell was showing a more hawkish tone. Which will investors believe, and will it be another market mover?
On top of all this, the reason the market was falling had more to do with the uncertainty about tariffs - at least that was what Apple was trying to tell us on Thursday, and the December jobs report did not to alleviate that issue.
We ended up seeing a decent rally during the weeks of Christmas and New Years, something history suggests is common. The day after Christmas was huge, as was the last day of New Year's week. It just wasn't a straight line up because everything else in between, and we'll throw Christmas Eve in there too, was probably more stressful than profitable for many. The fact that the two biggest rallies, December 26 and January 4, came the day after two of the worst days for the market (Christmas Eve and Apple's earnings warning day) suggests many were selling at the exact wrong times - at least on a short-term basis.
In bear markets, selling rallies is generally a good strategy so now we enter this new week with some positive economic data and a more flexible outlook from the Fed. Has everything changed, or is this the rally investors should be selling? That is the question.
We've looked at the weekly chart last week showing that, after holding at the 200-week moving average, there was some solid resistance just above 2600 and could be a possible upside target. That's more than 100 S&P 500 points above Friday's close, but not out of the question given how strong bear market rallies can be. By the way, as you'll see in the daily S&P 500 chart below, the 50-day EMA closed at 2638 on Friday, and is sliding lower.
I don't know if it will make it that high, but I suspect getting above there (2600) would be difficult. This market probably still needs a test of the December lows, but I'll take it week by week and be open minded about that prediction.
The S&P 500 / C-fund continues its big moves with Friday's being up with some help from the Fed and a strong jobs report. You can see that the 20-day EMA turned out to be the high on Friday. If it can get above that 20-day EMA, the next couple of levels that I would suspect could give this chart trouble is 2565 and then the 2625 area where the 50-day EMA is and where the weekly chart (up above) shows some long-term resistance.
The DWCPF (small caps / S-fund) has some room to run before testing that old breakdown area near the 50-day EMA and the old broken support line, but it has to get above the 20-day EMA first.
The Dow Transportation Index had a big day but it did not alleviate the bear flag problem that it is currently in. A breakout above the flag, which is not typical, would be a good sign, but unfortunately these bear flags tend to break down eventually.
The EFA (EAFE Index / I-fund) had a big day and it had a little room before testing that 50-day EMA, which has been a bear market road block for this index for months.
The price of oil rallied nicely but it did run out of steam and close off its lows after briefly breaking above that pesky 20-day EMA, which has held since mid-October.
The AGG (Bonds / F-fund) was down sharply as the "safety play" was off and investors moved from bonds back to stocks.
The 1-year chart shows that the long-term breakout level did hold at Friday's lows, and that's the must hold area for the AGG and bonds in the short-term, otherwise we could see some profit taking in bonds and a pullback from the recent dramatic gains.
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
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
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 use additional methods and strategies to determine fund positions.
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[TD][/TD]
[TD="align: center"]
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If you believe in the January Indicator, where "how goes the first week in January, so goes January", and "how goes January, so goes the year", you may be excited by last week's action and 1% gain for the S&P 500 as far how this year will go. The problem is, over the last several years, the 1st 3 days of January have been a poor indicator of how the year will go. In fact the opposite was more true.
After the stronger than expected jobs report, the Fed gave the market some solace with a more dovish tone. Not only did they say future interest rates will be more data dependent, but they also said the quantitative tightening (QT) of the balance may be looked at as well. That's new.
The ironic part of this is that the jobs report was so strong and the Fed's reasoning for raising rates and QT was because of some overheated economic data. They may have set themselves up for a disappointment for investors if the data does heat up again and they have to become more hawkish again after they threw that bone to investors on Friday.
On Wednesday we'll get an interesting version of the FOMC meeting minutes. On Friday we heard the Fed with a more dovish tone, but these minutes reflect what they were thinking at their last meeting when Jerome Powell was showing a more hawkish tone. Which will investors believe, and will it be another market mover?
On top of all this, the reason the market was falling had more to do with the uncertainty about tariffs - at least that was what Apple was trying to tell us on Thursday, and the December jobs report did not to alleviate that issue.
We ended up seeing a decent rally during the weeks of Christmas and New Years, something history suggests is common. The day after Christmas was huge, as was the last day of New Year's week. It just wasn't a straight line up because everything else in between, and we'll throw Christmas Eve in there too, was probably more stressful than profitable for many. The fact that the two biggest rallies, December 26 and January 4, came the day after two of the worst days for the market (Christmas Eve and Apple's earnings warning day) suggests many were selling at the exact wrong times - at least on a short-term basis.
In bear markets, selling rallies is generally a good strategy so now we enter this new week with some positive economic data and a more flexible outlook from the Fed. Has everything changed, or is this the rally investors should be selling? That is the question.
We've looked at the weekly chart last week showing that, after holding at the 200-week moving average, there was some solid resistance just above 2600 and could be a possible upside target. That's more than 100 S&P 500 points above Friday's close, but not out of the question given how strong bear market rallies can be. By the way, as you'll see in the daily S&P 500 chart below, the 50-day EMA closed at 2638 on Friday, and is sliding lower.
I don't know if it will make it that high, but I suspect getting above there (2600) would be difficult. This market probably still needs a test of the December lows, but I'll take it week by week and be open minded about that prediction.
The S&P 500 / C-fund continues its big moves with Friday's being up with some help from the Fed and a strong jobs report. You can see that the 20-day EMA turned out to be the high on Friday. If it can get above that 20-day EMA, the next couple of levels that I would suspect could give this chart trouble is 2565 and then the 2625 area where the 50-day EMA is and where the weekly chart (up above) shows some long-term resistance.
The DWCPF (small caps / S-fund) has some room to run before testing that old breakdown area near the 50-day EMA and the old broken support line, but it has to get above the 20-day EMA first.
The Dow Transportation Index had a big day but it did not alleviate the bear flag problem that it is currently in. A breakout above the flag, which is not typical, would be a good sign, but unfortunately these bear flags tend to break down eventually.
The EFA (EAFE Index / I-fund) had a big day and it had a little room before testing that 50-day EMA, which has been a bear market road block for this index for months.
The price of oil rallied nicely but it did run out of steam and close off its lows after briefly breaking above that pesky 20-day EMA, which has held since mid-October.
The AGG (Bonds / F-fund) was down sharply as the "safety play" was off and investors moved from bonds back to stocks.
The 1-year chart shows that the long-term breakout level did hold at Friday's lows, and that's the must hold area for the AGG and bonds in the short-term, otherwise we could see some profit taking in bonds and a pullback from the recent dramatic gains.
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
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
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 use additional methods and strategies to determine fund positions.
