Friday was an options expiration day and that big rally was not what we'd normally expect on an expiration day, but the bulls made a statement by pushing the S&P 500 to new all-time highs with that 1.23% gain, but can we trust it? Small caps started out slowly on Friday but came roaring back from an early loss to also gain over 1%. The I-fund was held back as the overseas markets were closed by the time the big gains came in the US market. Bonds managed a small gain as yields reversed down after opening higher.
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I suppose anything is possible on an options expiration week but we don't normally get a really big move like that. It's usually more of a battle for position, but the options market is a lot different than it used to be with more expirations throughout the month now.
The market timers have a question to ask themselves: Was the breakout to new highs on Friday the start of a new leg higher or, as we saw over the summer, will we get a fake out above resistance that fails mightily in a couple of weeks? The fake outs tend to be worst time to get onboard a trend.
The broader small caps indices don't look nearly as good as far as testing previous highs. This could mean a couple of things: Either they show that the market isn't as strong as the Magnificent Seven driven S&P 500 is telling us, or they are about to try to play catch up and rack up some big gains along the way?
The 10-year Treasury Yield and the dollar have been rallying in recent weeks and that has pushed the stock market into choppy mode. It looks both may be ready for a little pullback. The 10-year yield reversed down on Friday after moving above, then back below, its 50-day EMA.
Meanwhile the dollar (UUP) may have hit the neckline of an inverted head and shoulders pattern, and pulling back to fill that open gap would help form the right shoulder.
So, this could mean short-term relief for the stock market, but after that the headwinds could start blowing again.
A little follow up on something I talked about last Monday - the rare increase in the Fed's balance sheet which occurred between January 3rd and the 10th. For more context follow that link but the point was that when the Fed added to their balance sheet, stocks were up that week, and also for the next week or two after as well. The action early last week in stocks made this look like coincidental noise, but by the end of the week it happened again, and if the time frame remains consistent, we could see the S&P 500 up more over the next few days. After that, I don't know because they reduced the balance sheet last week.
Anyway, here is the chart again where the Fed raised their balance sheet last June, December and earlier in January.
I pointed out last Monday that stocks did rally in early June (similar to the December move below), and this chart shows that they were up after the December and January weekly balance sheet increases. And, if the pattern continues, they could be up for a few more days - but after that ??
And as I said, they reduced it back down again last week.
I had seen, and posted here last week, that Microsoft is supposed to report earnings on January 22 (today after the closing bell), but now on Yahoo, it shows them reporting on both January 22 (today) and also on January 30th, and that doesn't make sense so I'm not sure what that's about. Nasdaq.com shows January 30 as well, so that may be correct and perhaps only Tesla reports this week. Here are the earnings released dates of the other Magnificent Seven companies that could be market movers.
January 31, February 1 and 2nd could be some wild days for the stock market because not only will we be digesting major earnings releases from several of these Mag 7 companies, but there is a Fed FOMC meeting that week with a policy statement and decision on interest rates on January 31.
The S&P 500 (C-fund) broke out to a new high on Friday and that was perfect technical analysis after the formation of the small cup and handle pattern that began at the December highs. It's not a large cup and handle so the upside technical target isn't all that high, but now that it is above the all time highs made in early 2022, there's less long-term horizontal overhead resistance, although as I showed in the weekly chart up top, there is some rising resistance coming off the bear market lows.
DWCPF (S-fund) came back from early losses to close above the 20-day EMA again, after holding at the 50-day EMA earlier in the week. That bullish looking flag may be suggesting a breakout above the flag is coming, but a failure here would create a second lower high.
The EFA (I-fund) chart looks similar but it did not close above its 20-day EMA, thanks to the recent strength in the dollar. There is an open gap above the 20-day EMA that may be a lure in the short-term, but the dollar may have to cooperate this week. The UUP dollar chart up in the top section shows that large open gap that may try to get filled on the downside, and that would help this EFA chart.
BND (F-fund) also looks like it may get ready to bounce off the bottom of a bull flag. It's a tough call for yields, which move counter to this chart, as inflation pressure battles economic weakness and that is giving the Fed a whole lot to think about when it comes to interest rates. To cut or not to cut?
Thanks so much for reading! We'll see you back here tomorrow.
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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I suppose anything is possible on an options expiration week but we don't normally get a really big move like that. It's usually more of a battle for position, but the options market is a lot different than it used to be with more expirations throughout the month now.
The market timers have a question to ask themselves: Was the breakout to new highs on Friday the start of a new leg higher or, as we saw over the summer, will we get a fake out above resistance that fails mightily in a couple of weeks? The fake outs tend to be worst time to get onboard a trend.
The broader small caps indices don't look nearly as good as far as testing previous highs. This could mean a couple of things: Either they show that the market isn't as strong as the Magnificent Seven driven S&P 500 is telling us, or they are about to try to play catch up and rack up some big gains along the way?
The 10-year Treasury Yield and the dollar have been rallying in recent weeks and that has pushed the stock market into choppy mode. It looks both may be ready for a little pullback. The 10-year yield reversed down on Friday after moving above, then back below, its 50-day EMA.
Meanwhile the dollar (UUP) may have hit the neckline of an inverted head and shoulders pattern, and pulling back to fill that open gap would help form the right shoulder.
So, this could mean short-term relief for the stock market, but after that the headwinds could start blowing again.
A little follow up on something I talked about last Monday - the rare increase in the Fed's balance sheet which occurred between January 3rd and the 10th. For more context follow that link but the point was that when the Fed added to their balance sheet, stocks were up that week, and also for the next week or two after as well. The action early last week in stocks made this look like coincidental noise, but by the end of the week it happened again, and if the time frame remains consistent, we could see the S&P 500 up more over the next few days. After that, I don't know because they reduced the balance sheet last week.
Anyway, here is the chart again where the Fed raised their balance sheet last June, December and earlier in January.
I pointed out last Monday that stocks did rally in early June (similar to the December move below), and this chart shows that they were up after the December and January weekly balance sheet increases. And, if the pattern continues, they could be up for a few more days - but after that ??
And as I said, they reduced it back down again last week.
I had seen, and posted here last week, that Microsoft is supposed to report earnings on January 22 (today after the closing bell), but now on Yahoo, it shows them reporting on both January 22 (today) and also on January 30th, and that doesn't make sense so I'm not sure what that's about. Nasdaq.com shows January 30 as well, so that may be correct and perhaps only Tesla reports this week. Here are the earnings released dates of the other Magnificent Seven companies that could be market movers.
January 31, February 1 and 2nd could be some wild days for the stock market because not only will we be digesting major earnings releases from several of these Mag 7 companies, but there is a Fed FOMC meeting that week with a policy statement and decision on interest rates on January 31.
The S&P 500 (C-fund) broke out to a new high on Friday and that was perfect technical analysis after the formation of the small cup and handle pattern that began at the December highs. It's not a large cup and handle so the upside technical target isn't all that high, but now that it is above the all time highs made in early 2022, there's less long-term horizontal overhead resistance, although as I showed in the weekly chart up top, there is some rising resistance coming off the bear market lows.
DWCPF (S-fund) came back from early losses to close above the 20-day EMA again, after holding at the 50-day EMA earlier in the week. That bullish looking flag may be suggesting a breakout above the flag is coming, but a failure here would create a second lower high.
The EFA (I-fund) chart looks similar but it did not close above its 20-day EMA, thanks to the recent strength in the dollar. There is an open gap above the 20-day EMA that may be a lure in the short-term, but the dollar may have to cooperate this week. The UUP dollar chart up in the top section shows that large open gap that may try to get filled on the downside, and that would help this EFA chart.
BND (F-fund) also looks like it may get ready to bounce off the bottom of a bull flag. It's a tough call for yields, which move counter to this chart, as inflation pressure battles economic weakness and that is giving the Fed a whole lot to think about when it comes to interest rates. To cut or not to cut?
Thanks so much for reading! We'll see you back here tomorrow.
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.
