Now that was a Turnaround Tuesday! Stocks sold off after a stronger inflationary CPI Report than expected. The Dow lost 1276-points which was the largest loss in over two years. Volume was higher than normal, but nothing extreme that would indicate a capitulation, and that probably means we need to see more pain before this bear market runs its course. Small caps outperformed slightly as the S-fund did not quite hit the -4% mark, while the S&P lost 4.3%. Bonds were down as yields and the dollar spiked higher on the day.
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The CPI report was a disappointment for the economy and to the bulls who were anticipating a weaker inflationary report, but it is one of those rear-view mirror data points, and now we know inflation did not come down very much in August. We're now almost half-way through September already and the market will start looking ahead. Unfortunately what is immediately ahead is next week's FOMC meeting where the Fed will raise interest rates again, and they now have more ammunition to raise 0.75%, or even 1.0%.
The argument there is something we talked about yesterday - it's too early to see much of the effects of the prior rate increases they made earlier this year. Perhaps a big rate hike now would put the nail in the coffin of the economy. With the 2-year / 10-year yield curve inverted for the last 10 weeks, history suggests a recession is coming anyway, so if they just keep raising they might do some serious harm.
That's me interpreting what I am seeing and hearing because I don't have the economic background to know about that with any certainty, but it makes sense. Someone like Jeffrey Gundlach, who does understand this, suggests a 0.25% cut just to allow the prior cuts to work themselves into the system before completely crushing the economy.
Yields were up sharply and the dollar was up sharply, and that is a bad combination for the stock market.
The yield on the 10-year moved back over 3.4% for the first time since June when stocks were hitting their lows of 2022.
The dollar also sky rocketed gaining 1.38% after the recent false breakdown. They sure try to get people to lean the wrong way, don't they?
Oil was not up, but not really down either as the October futures closed near 87.65.
The index charts are a mess now as the futures charts posted outside negative reversal patterns since the futures were actually up pretty big before the CPI came out, and of course the futures and the cash indices (S&P 500, Nasdaq, etc.) all closed near the lows of the day.
There should eventually be some sizeable snap back rallies between now and the end of the month. Of course with only two IFTs per month, we don't get a lot of opportunities. For me, I am staying defensive and looking to October / November for a more serious long term buying opportunity, but I will use my IFTs between now and then to continue by hit and run trades when I can.
The VIX (volatility index) was up sharply but it only made it up to the highs of August and earlier in September. If this has any designs on testing the June highs, there could be a lot more damage done to the indices. I can't decide if the fact that it is only near 27 after what happened yesterday is a good thing, or not.
This is an options expiration week and the VIX has a lot to do with the pricing of options, so you never know what kind of shenanigans are going on there.
To get a good feel of the sentiment, watch how quickly rebounds fail (or don't). If a large money manager is trying to liquidate some stocks, they can't do it all at once. So if we get a dead cat bounce today or this week, watch how long, or if, it holds.
We should start hearing more about a railroad strike, which won't be great news for the economy, but maybe it will help nudge the Fed to be less hawkish next week? But then again, supply chain issues are actually inflationary. Tough one.
The S&P 500 (C-fund) lost over 4% and it always seems that declines are a lot more steep and quick than rallies. Yesterday's losses wiped out nearly all of the tremendous 4-day rally the market just experienced. It also filled the open gap from last week, but opened a new one above in the process. After two days above it, the chart is also back below its 50-day EMA.
Volume was slightly higher, but not extreme so I don't see any signs of capitulation yet. This Friday is the futures and options expiration day so volume will spike that day. The question is whether it will mean anything. As I've mentioned before, the prior huge volume quadruple witching expiration day in June, perhaps coincidentally turned out to be an intermediate-term low.
The DWCPF (S-fund / small caps) also opened a big overhead gap while filling last week's. It is back below the descending resistance line after the failed breakout. It should be testing that rising support line near 1660 at some point this week. It is also back below its 50-day EMA.
The EFA (I-fund) was down in sympathy with the U.S.'s weak economic data, but the 1.4% rally in the dollar was enough to push this fund lower. The decline actually filled two open gaps while opening up a new one.
BND (bonds / F-fund) was down as yields continue to plow higher. When will this turn around? Probably when we start to realize that we are in a recession, or inevitably going to be in one. I don't think Wall Street has fully embraced that possibility yet.
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
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks so much 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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The CPI report was a disappointment for the economy and to the bulls who were anticipating a weaker inflationary report, but it is one of those rear-view mirror data points, and now we know inflation did not come down very much in August. We're now almost half-way through September already and the market will start looking ahead. Unfortunately what is immediately ahead is next week's FOMC meeting where the Fed will raise interest rates again, and they now have more ammunition to raise 0.75%, or even 1.0%.
The argument there is something we talked about yesterday - it's too early to see much of the effects of the prior rate increases they made earlier this year. Perhaps a big rate hike now would put the nail in the coffin of the economy. With the 2-year / 10-year yield curve inverted for the last 10 weeks, history suggests a recession is coming anyway, so if they just keep raising they might do some serious harm.
That's me interpreting what I am seeing and hearing because I don't have the economic background to know about that with any certainty, but it makes sense. Someone like Jeffrey Gundlach, who does understand this, suggests a 0.25% cut just to allow the prior cuts to work themselves into the system before completely crushing the economy.
Yields were up sharply and the dollar was up sharply, and that is a bad combination for the stock market.
The yield on the 10-year moved back over 3.4% for the first time since June when stocks were hitting their lows of 2022.
The dollar also sky rocketed gaining 1.38% after the recent false breakdown. They sure try to get people to lean the wrong way, don't they?
Oil was not up, but not really down either as the October futures closed near 87.65.
The index charts are a mess now as the futures charts posted outside negative reversal patterns since the futures were actually up pretty big before the CPI came out, and of course the futures and the cash indices (S&P 500, Nasdaq, etc.) all closed near the lows of the day.
There should eventually be some sizeable snap back rallies between now and the end of the month. Of course with only two IFTs per month, we don't get a lot of opportunities. For me, I am staying defensive and looking to October / November for a more serious long term buying opportunity, but I will use my IFTs between now and then to continue by hit and run trades when I can.
The VIX (volatility index) was up sharply but it only made it up to the highs of August and earlier in September. If this has any designs on testing the June highs, there could be a lot more damage done to the indices. I can't decide if the fact that it is only near 27 after what happened yesterday is a good thing, or not.
This is an options expiration week and the VIX has a lot to do with the pricing of options, so you never know what kind of shenanigans are going on there.
To get a good feel of the sentiment, watch how quickly rebounds fail (or don't). If a large money manager is trying to liquidate some stocks, they can't do it all at once. So if we get a dead cat bounce today or this week, watch how long, or if, it holds.
We should start hearing more about a railroad strike, which won't be great news for the economy, but maybe it will help nudge the Fed to be less hawkish next week? But then again, supply chain issues are actually inflationary. Tough one.
The S&P 500 (C-fund) lost over 4% and it always seems that declines are a lot more steep and quick than rallies. Yesterday's losses wiped out nearly all of the tremendous 4-day rally the market just experienced. It also filled the open gap from last week, but opened a new one above in the process. After two days above it, the chart is also back below its 50-day EMA.
Volume was slightly higher, but not extreme so I don't see any signs of capitulation yet. This Friday is the futures and options expiration day so volume will spike that day. The question is whether it will mean anything. As I've mentioned before, the prior huge volume quadruple witching expiration day in June, perhaps coincidentally turned out to be an intermediate-term low.
The DWCPF (S-fund / small caps) also opened a big overhead gap while filling last week's. It is back below the descending resistance line after the failed breakout. It should be testing that rising support line near 1660 at some point this week. It is also back below its 50-day EMA.
The EFA (I-fund) was down in sympathy with the U.S.'s weak economic data, but the 1.4% rally in the dollar was enough to push this fund lower. The decline actually filled two open gaps while opening up a new one.
BND (bonds / F-fund) was down as yields continue to plow higher. When will this turn around? Probably when we start to realize that we are in a recession, or inevitably going to be in one. I don't think Wall Street has fully embraced that possibility yet.
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
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks so much 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.
