Yesterday was the second best day of the year for stocks, but of course that is coming off 6+ weeks of selling. The indices had become oversold and a relief rally was not a surprise, but perhaps the strength of the rally took some by surprise and we saw some FOMO (fear of missing out) buying by the close. The Dow gained an impressive 512-points, and the S&P 500 managed to close above that key 2800 level. Small caps and the Transports had big days.
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Historically, when the Fed moves from a hawkish / rate hiking posture, to a neutral / pause posture, markets have rallied between 20 and 30%. And the last 500-point day we saw in the Dow was on January 4th, the day the Fed put it out there that rate hikes were basically done. It has been a long time since we went from a hike to a pause because rates have been near 0% for so long. But I heard that historically going from a pause to rate cuts is not as bullish for stocks as we might expect, knowing it is a move to cut off recessionary concerns. The bond market has been way ahead of the Fed on this with the 10-year yield threatening to go below 2% recently.
Yes, we got another 500-point move and for the most part not a huge surprise given how oversold the market had gotten, but I don't expect it to lead to another 20% to 30% rally like it did in January. Yesterday we showed a chart with potential rally targets for this oversold market and yesterday's rally doesn't change that. We hit the first target, and as you'll see in the charts below, there are two more potential rebound targets if the rally can continue.
One of my biggest mistakes in recent years has been to not respect the strength of the market when it is rallying off market lows so take this warning for what it is... Just speculation. I may be completely wrong. But there is a difference when a market is dealing with yield curve inversions and recessionary concerns, not to mention a trade war.
The May jobs report comes out on Friday morning, and estimates are looking for a gain of 185,000 jobs, an unemployment rate of 3.7%, and wage growth of +0.3%. We talked on Monday about how this one could be trouble, but a weak report can also trigger more rate cut speculation. It's a fine line. Sell a weak report or buy it because of a potential rate cut? I would think any rally off of rate cut enthusiasm could be sold quickly, however.
The S&P 500 (C-fund) blasted off out of the gate on Turnaround Tuesday and in one day reached our initial target for a relief rally, which was the 2800 area. It also managed to break above the 200-day EMA after 2 closes below it. On Monday, if you recall, we talked about needing to see at least 3 closes below it to confirm the breakdown. The 100-day EMA and the descending resistance line are now in the way of that next possible target, which is the top of that open gap near 2850. The 50-day EMA is sitting near 2840, so that's another potential roadblock.
This longer-term chart shows the 2800 to 2820 areas that have been crucial areas of support and resistance since the correction back in January 2018.
Click chart to enlarge
The DWCPF (S-fund) gained an impressive 2.56% yesterday, pushing through the descending resistance line and breaking that devastating downtrend. The 200-day EMA is still in the way here, and the top of the next overhead open gap is about 1% above the current level.
The EFA (I-Fund) made its way to the top of that descending channel, and just barely poked above the 200-day EMA. It's a good start but the 50-day EMA is next, and it failed there on the last attempt.
The Dow Transportation Index was up 3.3% yesterday pushing it back above 10,000 which has been a key level there. The 50-day EMA just crossed below the 200-day EMA and when that happens it usually means it's due for a relief rally. Turning that 50-day EMA up again with be a little tougher, but there is room for this to run up a little longer.
The High Yield Corporate Bond Fund gained 1% yesterday, which is a big move for that fund, and that rally pushed it back above the 50-day EMA after several closes below it. I'm not sure how much we can trust it since it is still at the top of a rising channel that could easily fail. But if it can continue to rally, the stock market will likely follow suit.
The AGG (Bonds / F-fund) pulled back a bit yesterday and some profit taking in bonds is no surprise given the strength in the recent rally, plus it's hitting the top of that parallel rising channel. I don't know if it will make its way all the way back down to the bottom of the channel again, but perhaps the red dashed line in between.
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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Historically, when the Fed moves from a hawkish / rate hiking posture, to a neutral / pause posture, markets have rallied between 20 and 30%. And the last 500-point day we saw in the Dow was on January 4th, the day the Fed put it out there that rate hikes were basically done. It has been a long time since we went from a hike to a pause because rates have been near 0% for so long. But I heard that historically going from a pause to rate cuts is not as bullish for stocks as we might expect, knowing it is a move to cut off recessionary concerns. The bond market has been way ahead of the Fed on this with the 10-year yield threatening to go below 2% recently.
Yes, we got another 500-point move and for the most part not a huge surprise given how oversold the market had gotten, but I don't expect it to lead to another 20% to 30% rally like it did in January. Yesterday we showed a chart with potential rally targets for this oversold market and yesterday's rally doesn't change that. We hit the first target, and as you'll see in the charts below, there are two more potential rebound targets if the rally can continue.
One of my biggest mistakes in recent years has been to not respect the strength of the market when it is rallying off market lows so take this warning for what it is... Just speculation. I may be completely wrong. But there is a difference when a market is dealing with yield curve inversions and recessionary concerns, not to mention a trade war.
The May jobs report comes out on Friday morning, and estimates are looking for a gain of 185,000 jobs, an unemployment rate of 3.7%, and wage growth of +0.3%. We talked on Monday about how this one could be trouble, but a weak report can also trigger more rate cut speculation. It's a fine line. Sell a weak report or buy it because of a potential rate cut? I would think any rally off of rate cut enthusiasm could be sold quickly, however.
The S&P 500 (C-fund) blasted off out of the gate on Turnaround Tuesday and in one day reached our initial target for a relief rally, which was the 2800 area. It also managed to break above the 200-day EMA after 2 closes below it. On Monday, if you recall, we talked about needing to see at least 3 closes below it to confirm the breakdown. The 100-day EMA and the descending resistance line are now in the way of that next possible target, which is the top of that open gap near 2850. The 50-day EMA is sitting near 2840, so that's another potential roadblock.
This longer-term chart shows the 2800 to 2820 areas that have been crucial areas of support and resistance since the correction back in January 2018.
Click chart to enlarge
The DWCPF (S-fund) gained an impressive 2.56% yesterday, pushing through the descending resistance line and breaking that devastating downtrend. The 200-day EMA is still in the way here, and the top of the next overhead open gap is about 1% above the current level.
The EFA (I-Fund) made its way to the top of that descending channel, and just barely poked above the 200-day EMA. It's a good start but the 50-day EMA is next, and it failed there on the last attempt.
The Dow Transportation Index was up 3.3% yesterday pushing it back above 10,000 which has been a key level there. The 50-day EMA just crossed below the 200-day EMA and when that happens it usually means it's due for a relief rally. Turning that 50-day EMA up again with be a little tougher, but there is room for this to run up a little longer.
The High Yield Corporate Bond Fund gained 1% yesterday, which is a big move for that fund, and that rally pushed it back above the 50-day EMA after several closes below it. I'm not sure how much we can trust it since it is still at the top of a rising channel that could easily fail. But if it can continue to rally, the stock market will likely follow suit.
The AGG (Bonds / F-fund) pulled back a bit yesterday and some profit taking in bonds is no surprise given the strength in the recent rally, plus it's hitting the top of that parallel rising channel. I don't know if it will make its way all the way back down to the bottom of the channel again, but perhaps the red dashed line in between.
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.
