Stocks shrugged off a big negative surprise in the final 1st quarter GDP number and rallied posting solid gains. The Dow gained 49-points, and percentage-wise, the broader indices did even better.
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As we suspected, the I-fund did not survive Tuesday's sell-off as much as Tuesday's price indicated, and it had to do a little give-backs on Wednesday.
The negative GDP (-2.9%) means the economy retracted in the 1st quarter, and many call it an aberration caused by the bad weather this past winter. The initial estimate for the 1st quarter was +0.1% so it was way off. So why did stocks go up when the GDP was so negative? It could be several reasons and here's some...
GDP is a rear-view mirror indicator. This was the economic growth figure for January through March. It's over and, unless you believe we're heading into a recession, the following quarter tends to snap back so it may be a good sign for quarter #2, which is actually ending on Monday.
Interest rates and bond purchasing: Even if the 2nd quarter shows solid growth, the first half of the year is probably going to be close to 0% at best. This is fodder for those who want continued low interest rates and an accommodating Fed who will continue their bond buying policy if the economy is actually slowing. Low rates mean stocks are a better place to put your money since bonds and savings accounts aren't paying much.
The concern is that we are seeing GDP trend lower:
2013 3rd Qtr: +4.1%
2013 4th Qtr: +2.6%
2014 1st Qtr: -2.9%
Yesterday the SPY (S&P 500 / C-fund) regained much of Tuesday losses and came to rest at the bottom of what may be a parallel rising trading channel (thin red lines). While the actual support lines may be above or below that line, often a parallel channel will create support and those two thin red lines are an exactly parallel. The bottom of that channel is in close proximity to the 20-day EMA, so that may be the support area to watch right now.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Wilshire 4500 (S-Fund) rallied and created a positive reversal day, but now it has to deal with the resistance of the March highs again. I still don't think this chart formation shows enough of a consolidation to breakout to new highs and hold, but the Wilshire 4500 is not as closely watched and some of the normal self-fulfilling prophesies we see in the reaction to technical analysis in the major indices may not be as influential in the Wilshire.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Nasdaq 100 (QQQ) actually made a new closing high yesterday, although the intraday high came up a little short of Tuesday's high. It looks like a breakout but volume wasn't all that impressive and it's not much of a "handle" in a lopsided cup and handle formation - although it did take 3-weeks to form.
Germany is generally considered the leading economy in Europe so the DAX is an important index to watch, and it recently broke down from a rising trading channel. Perhaps it is just going to move down to fill that open gap near 9800, but a break down is a warning sign and we should probably keep an eye on this.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
Bonds were up and we saw some breakouts on the charts as the IEF finally moved out of the trading range we have been watching (blue). There may be some resistance in this area from an old support line (red), but it's possible for a new rising trend to start while staying below that rising resistance line. This looks like a good sign for the F-fund, but that's just day one of a breakout so I'll wait a couple of days before confirming.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
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Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
Posted daily at TSP Talk Market Commentary
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.
