Stocks were rattled again on Wednesday and without improvement later this week, the Dow, down another 221-points, would be looking at its 6th straight losing week. We did see some buying kick in just after noon ET after the S&P 500 broke below its 200-day EMA. The Dow was down over 400-points at the lows so it was a decent reversal, although it's not really a classic positive reversal day since we did close with big losses.
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The Mueller press conference yesterday seemed to have a negative impact on stocks as the downside accelerated just after he finished speaking. By the close most of that post-Mueller loss was recovered however, so it's really mostly about those yields, which are likely reacting in most part to the trade war. The yield on the 10-year Treasury fell again, down to 2.21% at the lows, and closed at a 20-month low near 2.236%.
A longer-term chart of the 10-year yield shows that this recent decline is hitting one possible level of support, but 1.75% (and falling) is another possible target should 2.2% break.
As we have been talking about for weeks, if not months, we were seeing some cracks in the economy in the form of lower prices in economically sensitive commodities like oil, copper, and lumber, while bond yields kept falling. Now we're see some extremes in yields, as the chart above may be suggesting, and with the 10-year Treasury yield being at 20-month lows, perhaps some kind of recession is being priced in. The potential recession may not show up until 2020, but the market can smell these things out faster than the masses.
The consumer doesn't feel it yet. They are usually the last to know, but you can see in this chart that extremely high consumer confidence can actually precede a recession by maybe a year, give or take, and right now consumers are hitting confidence levels last seen during the dot com rally and before that you have to go all the way back to the late 1960's. Recession were around the corner in both cases and even in some of the less extreme confidence levels.
Chart provided courtesy of www.sentimentrader.com
The trade war is one of the main culprits as we've said, and higher tariffs may slow down consumer spending, which impacts earnings, which the stock market does not like, but recessions are also cyclical and inevitable - short of the Fed cutting back to 0% interest rates.
On a positive note, the chances of a Fed rate cut has increased, and any surprise positive move on trade negotiations could easily turn things around, but right now the market is reacting to the potential slowdown in the economy, and that monster rally that we had to start the year certainly sucked in a lot of investors who were counting on smooth sailing in 2019. But the market does that. It also made those of us who were more bearish, looking for a topping formation, look ridiculous for several months.
The S&P 500 (C-fund) opened lower on Wednesday, accelerated lower into the late morning before stocks caught a bid just after noon ET. The late rally petered out and we still saw stiff losses by the close, but that long "kangaroo-tail" formation below the 200-day EMA may provide some upside momentum, whether short-term or longer. There's some large open gaps overhead that may need attention, and that small gap from early May is still open near 2740.
The weekly chart shows the prior two severe sell-offs going back to January 2018. They both has steep declines, similar to the current decline, but the descending resistance was broken by snap-back rallies. However, as you can see, those rallies eventually failed so rallies probably still need to be sold.
The DWCPF (S-fund) small caps fell below some key support, after falling below the 200-day EMA last week. Watch that old support line near 1350, because it may now try to act as resistance. There are two open gaps above that may lure it up for a few days.
The Dow Transportation Index also fell below another level of support that seemed critical. We've talked about that 10,000 area as being key since support below that is very hard to find. Stocks don't go straight down forever so I'd expect a bounce here, but 10,000 could now act as resistance in any half-hearted relief rally.
The EFA gapped lower and with the dollar making a new closing high, plus the fair value adjustment from Tuesday, the I-fund took one on the chin yesterday. It too had a nice positive reversal formation, but there's a lot of technical damage done to this chart.
The AGG (Bonds / F-fund) was up slightly but there was a clear negative reversal on the chart, and that could mean a temporary pause for the bond market. A move back down to support would be a clean pullback level. I'm looking for a down day today in the F-fund.
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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[/TR]
[/TABLE]
[/TD]
[TD]
[/TD]
[TD="align: center"]
[/TR]
[/TABLE]
The Mueller press conference yesterday seemed to have a negative impact on stocks as the downside accelerated just after he finished speaking. By the close most of that post-Mueller loss was recovered however, so it's really mostly about those yields, which are likely reacting in most part to the trade war. The yield on the 10-year Treasury fell again, down to 2.21% at the lows, and closed at a 20-month low near 2.236%.
A longer-term chart of the 10-year yield shows that this recent decline is hitting one possible level of support, but 1.75% (and falling) is another possible target should 2.2% break.
As we have been talking about for weeks, if not months, we were seeing some cracks in the economy in the form of lower prices in economically sensitive commodities like oil, copper, and lumber, while bond yields kept falling. Now we're see some extremes in yields, as the chart above may be suggesting, and with the 10-year Treasury yield being at 20-month lows, perhaps some kind of recession is being priced in. The potential recession may not show up until 2020, but the market can smell these things out faster than the masses.
The consumer doesn't feel it yet. They are usually the last to know, but you can see in this chart that extremely high consumer confidence can actually precede a recession by maybe a year, give or take, and right now consumers are hitting confidence levels last seen during the dot com rally and before that you have to go all the way back to the late 1960's. Recession were around the corner in both cases and even in some of the less extreme confidence levels.
Chart provided courtesy of www.sentimentrader.com
The trade war is one of the main culprits as we've said, and higher tariffs may slow down consumer spending, which impacts earnings, which the stock market does not like, but recessions are also cyclical and inevitable - short of the Fed cutting back to 0% interest rates.
On a positive note, the chances of a Fed rate cut has increased, and any surprise positive move on trade negotiations could easily turn things around, but right now the market is reacting to the potential slowdown in the economy, and that monster rally that we had to start the year certainly sucked in a lot of investors who were counting on smooth sailing in 2019. But the market does that. It also made those of us who were more bearish, looking for a topping formation, look ridiculous for several months.
The S&P 500 (C-fund) opened lower on Wednesday, accelerated lower into the late morning before stocks caught a bid just after noon ET. The late rally petered out and we still saw stiff losses by the close, but that long "kangaroo-tail" formation below the 200-day EMA may provide some upside momentum, whether short-term or longer. There's some large open gaps overhead that may need attention, and that small gap from early May is still open near 2740.
The weekly chart shows the prior two severe sell-offs going back to January 2018. They both has steep declines, similar to the current decline, but the descending resistance was broken by snap-back rallies. However, as you can see, those rallies eventually failed so rallies probably still need to be sold.
The DWCPF (S-fund) small caps fell below some key support, after falling below the 200-day EMA last week. Watch that old support line near 1350, because it may now try to act as resistance. There are two open gaps above that may lure it up for a few days.
The Dow Transportation Index also fell below another level of support that seemed critical. We've talked about that 10,000 area as being key since support below that is very hard to find. Stocks don't go straight down forever so I'd expect a bounce here, but 10,000 could now act as resistance in any half-hearted relief rally.
The EFA gapped lower and with the dollar making a new closing high, plus the fair value adjustment from Tuesday, the I-fund took one on the chin yesterday. It too had a nice positive reversal formation, but there's a lot of technical damage done to this chart.
The AGG (Bonds / F-fund) was up slightly but there was a clear negative reversal on the chart, and that could mean a temporary pause for the bond market. A move back down to support would be a clean pullback level. I'm looking for a down day today in the F-fund.
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.
