8/02/12
A lethargic early rally yesterday stalled after the Fed disappointed investors. Modest gains turned into losses, and we saw big declines in small caps and transportation stocks. The Dow lost 38-points.
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[TD="align: center"] Daily TSP Funds Return
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[TD="align: right"] G-Fund:
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[TD] +0.004%
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[TD="align: right"] F-fund:
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[TD] - 0.15%
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[TD="align: right"] C-fund:
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[TD] - 0.27%
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[TD="align: right"] S-fund:
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[TD] - 1.25%
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[TD="align: right"] I-fund:
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[TD] - 0.11%
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The market has held up well, despite the consistent release of weak economic data, in hopes that the Fed would step up with more assistance. Yesterday the Fed said, "Economic activity decelerated somewhat over the first half of this year," and they "will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." But no concrete action has been taken so the market responded with late selling by disappointed investors.
The S&P 500 is still working on a bull flag, which is a bullish formation that tends to break to the upside after consolidating.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The problem is that the market leaders also had bull flags and they are not breaking to the upside, but rather breaking sharply lower.
The bull flag on the Dow Transportation Index was looking for support at the major moving averages, but yesterday's weakness in stocks like FedEx and some of the airlines sent the Transportation Index reeling downward.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The small caps of the Russell 2000 saw a similar fate as the bull flag broke sharply downward, breaking below the 20, 50, and 200-day EMAs. Strong resistance near 800 was too tough to overcome.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The small caps have been underperforming the larger companies of the S&P 500 and its always been thought that this is a negative sign for the market.
Here's some data from sentimenTrader.com showing how the S&P 500 performed after the Russell 2000 underperformed while both were coming off highs.
Chart provided courtesy of www.sentimentrader.com
Bad, but nothing too terrible, and most of the big negative numbers came over 10 years ago.
The dollar is fighting the fight that we have been keeping an eye on. The two open gaps, one above and one below, have both been partially filled. Since gaps are always looking to get filled, the dollar is trying to find direction to fill one or the other, although both will likely be filled eventually.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The 50-day EMA is acting as support and the Fed's inaction gave the dollar a little boost yesterday, which hurt stocks.
This brings up an interesting situation for Friday's jobs report. The report is obviously a market mover, but will stocks move counter to the obvious reaction of the jobs report this time because investors want QE3 and a weak report is more likely to get them closer to QE3 than a strong report?
A QE3 would weaken the dollar and likely send stocks higher. No QE3 will keep the dollar afloat longer and be a drag on the stock market. So, will a strong jobs report do more harm than good for stocks?
Thanks for reading! We'll see you here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.html
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