Stocks were slightly higher and stabilized for most of the day yesterday, but after the Fed minutes were released, where there were hints of possible QE tapering, the dollar and yields rallied, stocks and bonds fell, as well as inflation-sensitive commodities like gold and silver which were hit particularly hard.
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[TD="width: 80, align: right"] +0.0063%[/TD]
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[TD="width: 80, align: right"] -0.27%[/TD]
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[TD="width: 80, align: right"] -0.36%[/TD]
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[TD="width: 80, align: right"] -0.23%[/TD]
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[TD="width: 80, align: right"] -0.26%[/TD]
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Today's commentary is copy of our full TSP Talk Plus Report Commentary. This is the type of commentary TSP Talk Plus subscribers have access to every day. This along with the full Sentiment Survey data and System buy / sell signals and analysis. 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
To investors, the thought of tapering is like taking candy away from a baby. There's going to be some crying. And investors did that yesterday by doing a little selling. The Dow lost 66-points, but after the Fed minutes were released, the Dow went from being up about 50-points, to being down over 100, before settling at the -66 level.
Tapering talk gave the dollar a boost. The "printing" by the Fed has had an effect of weakening the dollar because the supply of dollars grows. Slowing down the printing of new money would then stabilize and strengthen the dollar. A strong rising dollar has a negative impact on the value of anything priced in dollars and in particularly inflation sensitive vehicles like gold and silver. The UUP dollar ETF rallied from a bull flag-like formation.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The S&P 500 (SPY) is testing the bottom of the narrowing wedge. It has been down for three days in a row now. Is this a topping process or a "buy the dip" in a bull market opportunity? A rising wedge is bearish so I have to lean that way.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Nasdaq fell below the recent rising support line and closed just below the 20-day EMA. Should that breakdown be confirmed with 3+ closes below that support, the 50-day EMA would be the next level to potentially be tested, and don't forget there is still an open gap down near 3700, should the 50 EMA not hold.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Transports are also testing the bottom of a rising wedge formation after being down for a third straight day.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
We've been talking about these outside reversal days recently, and yesterday the S&P 500 created a 4th negative outside reversal day in the last 16 days.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Right on queue, sentimenTrader.com did their research and found prior instances of this rare situation.Per sentimenTrader.com:
"Dating back to the inception of SPY, there have only been a handful of other times we've seen this many reversals within 16 days, when the S&P had traded at a 52-week high at some point during those three weeks."
What happened next? It wasn't a one-way street as the very short-term saw some strength, but going out 2 weeks to 6 months, stocks mostly underperformed compared to random action.
Chart provided courtesy of www.sentimentrader.com, analysis by TSP Talk
I posted this ARMS Index chart a few days ago showing that it had reached a point of possible concern, 0.90. Since then it has rolled over so we wanted to check the prior instance when it hit the 0.90 area and then moved back below 0.90. The results were mixed but almost every time the NYSE at the very least stopped going up for a short period of time. The last three instances saw measurable pullbacks over the following weeks.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Rydex Cash Flow Ratio is back up to its three year resistance line. This is another sign of possible excessive bullishness from investors, which tends to be bearish for stocks. The prior tests of this resistance line saw fairly consistent pullbacks going forward.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Bonds fell sharply following the release of the Fed minutes. The 20+ year bond fund has now broken below the neckline of a bearish head and shoulders pattern. Not good. The 7 to 10-year bond fund is still above the neckline, but like we see in the 20+, head and shoulders patterns tend to break to the downside.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
You can see how much yields spiked after the price of bonds fell on the news yesterday.
Chart provided courtesy of www.decisionpoint.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
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