Another sell off in stocks on Thursday, although as late as 1:30 PM ET we were still seeing green in the indices. It was the market trying to compute what Jerome Powell was saying, and while he was vaguely unchanged in opinion, investors decided it was time to do more selling. The Dow lost 251-points but it was the 10-year yield basically hitting 5% (it was trading at 5% after hours) that may have eventually sent the bulls running for covering again.
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Powell said he is proceeding carefully regarding rates, keeping the door open to another rate hike, but perhaps not until December or January, and even then the odds favor no more rate hikes.
That didn't stop the 10-year Treasury Yield from moving to a 16 year high. This certainly scared the market but from a technical analysis standpoint, this chart is now extremely stretched and well above its 200-day moving average, which is still all the way down near 2.25%. I suppose anything can happen because of the "it's different this time" attitude, but at some point the oversold bond market will bounce and yields will pull back.
I saw this pointed out yesterday and thought it was very interesting, and depending on how you look at it, it may be bullish or bearish news for the stock market. The Leading Economic Indicators (the "LEI") tend to lead the economy, or GDP. Look at the current spread between the two right now where GDP is actually moving up, and the Leading Indicators have been plummeting. A sharply declining LEI almost always leads to a recession. If a recession is coming, would GDP be going up? No way. If GDP finally follows the leading indicators to the downside, as history suggests, what will bond yields and the Fed's interest rates do? Most likely fall sharply.
Source: https://www.conference-board.org/topics/us-leading-indicators
I have no idea how it will actually play out, but don't you think if yields start sinking the stock market will be relieved -- at least initially?
The recent decline in stocks has done a couple of things to the longer term weekly chart of the S&P 500. One is we have a negative outside reversal week candlestick forming, but with one day to go, we don't know where it will close. If the S&P 500 is down again today completing the negative outside reversal candlestick, the chart would normally be very vulnerable to further downside, but look at all of the support between 4200 and 4250. Plus that looks like a possible bull flag. So short-term, maybe 4250 or 4200, which would be less than 2% from yesterday's close. And if support does hold, the upside would look pretty good.
The Russell 2000 small cap index is in an interesting situation. This is also a weekly chart and that looks like a giant bear flag which , if broken, would have a really horrible downside target. But look at that 300 week moving average. Outside of the financial crisis and the COVID crash, it has held firmly for years.
The S-fund's weekly chart looks similar with 1600 possible, but it the long term support holds here at the bottom of the wide trading channel (and that's of course an important if), there is a lot of room above.
If we were doing business as usual this might look like a pretty good place for a low. The concern is that there are certainly a ton of issues out there including those higher yields, the Fed reducing their balance sheet (QT), multiple wars going on which, God forbid it turns into WWIII, and we are probably about to get into the most contentious election campaign ever with a country that couldn't be more divided.
So, should we buy the fear or build a bomb shelter?
The S&P 500 (C-fund) did what has been the trend over the last year and a half. The bull flag I was watching broke down instead of up. The trading channel and the head and shoulders patterns have been helpful, but flag formations have been throwing us curve balls. As for what comes next, the 200-day EMA is being tested right now, for a second time during this correction. There's not a lot of good things to say except that fear is rising a lot and it's usually getting close to being too late to sell when that happens, and maybe time to do some nibbling for those who have been patient and have some cash on hand.
DWCPF (S-fund, small caps) is testing a double bottom but this head and shoulders pattern has been playing out in a textbook fashion and the downside target would be lower. In hindsight it looked so obviously bearish, but while it's forming it's easy to doubt or deny what is happening. Now it's a matter of whether the double bottom holds and if we get an oversold bounce.
The EFA (I-fund) looks very similar to the S-fund chart. It will probably seem obvious later when viewing in hindsight, but right now we have to determine if we think this will be a double bottom low buying opportunity, or a break down to a lower low.
BND (bonds / F-fund) just keeps getting hammered, and as we often see in bull and bear markets, the moves tend to last longer than seems reasonable. I keep thinking bonds are a bargain at these levels, but I have said that a few times over the last couple of months.
Thanks so much for reading! Have a great weekend!
Tom Crowley
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
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
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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Powell said he is proceeding carefully regarding rates, keeping the door open to another rate hike, but perhaps not until December or January, and even then the odds favor no more rate hikes.
That didn't stop the 10-year Treasury Yield from moving to a 16 year high. This certainly scared the market but from a technical analysis standpoint, this chart is now extremely stretched and well above its 200-day moving average, which is still all the way down near 2.25%. I suppose anything can happen because of the "it's different this time" attitude, but at some point the oversold bond market will bounce and yields will pull back.
I saw this pointed out yesterday and thought it was very interesting, and depending on how you look at it, it may be bullish or bearish news for the stock market. The Leading Economic Indicators (the "LEI") tend to lead the economy, or GDP. Look at the current spread between the two right now where GDP is actually moving up, and the Leading Indicators have been plummeting. A sharply declining LEI almost always leads to a recession. If a recession is coming, would GDP be going up? No way. If GDP finally follows the leading indicators to the downside, as history suggests, what will bond yields and the Fed's interest rates do? Most likely fall sharply.
Source: https://www.conference-board.org/topics/us-leading-indicators
I have no idea how it will actually play out, but don't you think if yields start sinking the stock market will be relieved -- at least initially?
The recent decline in stocks has done a couple of things to the longer term weekly chart of the S&P 500. One is we have a negative outside reversal week candlestick forming, but with one day to go, we don't know where it will close. If the S&P 500 is down again today completing the negative outside reversal candlestick, the chart would normally be very vulnerable to further downside, but look at all of the support between 4200 and 4250. Plus that looks like a possible bull flag. So short-term, maybe 4250 or 4200, which would be less than 2% from yesterday's close. And if support does hold, the upside would look pretty good.
The Russell 2000 small cap index is in an interesting situation. This is also a weekly chart and that looks like a giant bear flag which , if broken, would have a really horrible downside target. But look at that 300 week moving average. Outside of the financial crisis and the COVID crash, it has held firmly for years.
The S-fund's weekly chart looks similar with 1600 possible, but it the long term support holds here at the bottom of the wide trading channel (and that's of course an important if), there is a lot of room above.
If we were doing business as usual this might look like a pretty good place for a low. The concern is that there are certainly a ton of issues out there including those higher yields, the Fed reducing their balance sheet (QT), multiple wars going on which, God forbid it turns into WWIII, and we are probably about to get into the most contentious election campaign ever with a country that couldn't be more divided.
So, should we buy the fear or build a bomb shelter?
The S&P 500 (C-fund) did what has been the trend over the last year and a half. The bull flag I was watching broke down instead of up. The trading channel and the head and shoulders patterns have been helpful, but flag formations have been throwing us curve balls. As for what comes next, the 200-day EMA is being tested right now, for a second time during this correction. There's not a lot of good things to say except that fear is rising a lot and it's usually getting close to being too late to sell when that happens, and maybe time to do some nibbling for those who have been patient and have some cash on hand.
DWCPF (S-fund, small caps) is testing a double bottom but this head and shoulders pattern has been playing out in a textbook fashion and the downside target would be lower. In hindsight it looked so obviously bearish, but while it's forming it's easy to doubt or deny what is happening. Now it's a matter of whether the double bottom holds and if we get an oversold bounce.
The EFA (I-fund) looks very similar to the S-fund chart. It will probably seem obvious later when viewing in hindsight, but right now we have to determine if we think this will be a double bottom low buying opportunity, or a break down to a lower low.
BND (bonds / F-fund) just keeps getting hammered, and as we often see in bull and bear markets, the moves tend to last longer than seems reasonable. I keep thinking bonds are a bargain at these levels, but I have said that a few times over the last couple of months.
Thanks so much for reading! Have a great weekend!
Tom Crowley
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
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
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.
