Stocks sold off on Thursday as investors' concern over interest rate hikes plus continued signs of economic weakness adds up to some trouble and a good reason for some profit taking. The Dow lost 254-points on the day.
The Fed has painted themselves in a corner and are looking to get out of this 0% interest rate environment but a sharp decline in commodities, in particular oil and copper which are both very economically sensitive, may be telling us that the economy is not all that strong and if the Fed insists on raising rates, this would not be a great combination for the stock market. Of course there are some who believe the Fed will continue to find reasons to hold off on raising rates, possibly until after the election next year. I don't know how the Fed would get away with something like that unless the economy did show signs of flat to negative growth.
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The share prices above represent two days of action. The I-fund withstood the decline yesterday in part do due to a decline in the dollar yesterday.
The SPY (S&P 500 / C-fund) filled what was left of an open gap from late October, and it looks like the 50-day EMA is the next level of support to be tested. We've stopped talking about the open gap from early October because it had been put far back on the rear-view mirror, but keep it in mind. If you remember, there was a small open gap on the weekly chart of the S&P and they always get filled. That's a long way down to 195 and it doesn't seem likely, but there are very few open gaps on a weekly chart. I looked back for two decades and didn't see any.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Dow Completion Index (small caps / S-Fund) fell through the 50-day EMA and the bear market action resumes here before the small cap scan ever broke above the 200-day EMA like the S&P did a month ago.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The EFA (EAFE Index / I-fund) is also pulling back from the 200-day and and has now closed for a fourth day below the 50-day EMA. That open gap is rather obvious.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The dollar fell sharply yesterday, but that gap was too tempting to leave open. It is still slightly open and with the dollar in an uptrend, the bottom of the gap may act as support.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The price of oil accelerated down yesterday despite the weakness in the dollar so that was really bad. Copper is in the same boat and what is this telling us about demand for these economically sensitive commodities?
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The AGG (bonds / F-fund) was up slightly yesterday but has formed a second bear flag after the first broke down last week. Interest rates hikes are becoming more accepted by the bond market.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
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Thanks for reading. We'll see you back here on tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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