Stocks rallied hard for a second straight day as the Dow gained 285-points on Wednesday, and the 2-day rally has recovered 554-points of the 871-point Brexit sell-off. We've seen repeated "V" bottoms over the last couple of years as investors chase the rallies off the lows out of fear of missing out, and in the past that fear was warranted. But a test of the major lows is not out of the question and it has actually happened twice in the last year, which you'll see below.
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Small caps led on the day and bonds were down for the first time since before the Brexit vote. With bond yields so low, investors seem to jump on the runaway market in order to find some kind of return. The "V" bottoms in the past had left many underinvested, and that seems to be the catalyst for stocks as no one wants to be left behind. Of course if the buying is excessive, some profit taking could trigger some pullbacks, but how quick will the dip buyers be at that point?
This market is still volatile and I wouldn't get too comfortable, but you know how that wall of worry works?
The SPY (S&P 500 / C-Fund) opened sharply higher for a second straight day, opening a large gap in the process. That's two pretty large gaps on the SPY chart, both of which could potentially get filled in the short-term and that would mean more volatility. It has now closed above the 200-day EMA for a second straight day, after just one close below it.
The weekly chart shows the dramatic improvement after Monday's breakdown below the 50-week EMA. But the last two major market lows each saw retests of those lows before rallying toward the old highs.
The DWCPF (S-fund) gapped up on Wednesday while filling the gap (purple) from Monday morning. It's back above the 200-day EMA, which is big, but the bears may be suggesting that this, and all of the charts, are just a dead cat bounce that needs to be sold. Are they right?
The Dow Transportation Index had a nice 2-day rally as well, pushing back into its trading channel, but this chart is still worrisome as we have a clear downtrend in this market leader.
The EFA (I-fund) gapped up again. The largest gap is overhead and won't get closed until it hits 58.0, but even if only gets half filled (up to 56.50), that would be about a 3% gain from the current levels.
The London FTSE has surprisingly closed at its highest point since mid-April. That may be a little concerning as it erased all of the Brexit selling. Is that possibly some irrational exuberance?
Here's the July seasonality chart:
Chart provided courtesy of www.sentimentrader.com
The AGG (Bonds / F-fund) moved slightly lower yesterday, which makes sense when stocks are up as much as they have been. The fact that bonds did not go down on Tuesday's rally, and they only fell slightly after the 285-point rally, is an eye opener. The bond market traders do not seem to believe the worst is over yet for stocks as they cling to safety.
From www.tsp.gov: "Some financial markets will be closed on Monday, July 4th in observance of the Independence Day holiday. The Thrift Savings Plan will also be closed. Transactions that would have been processed Monday night (July 4th) will be processed Tuesday night (July 5th), at Tuesday's closing share prices."
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Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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