Stocks had another rough session on Friday and once again some early gains were quickly swept away with a steady dose of selling from late morning into the close. The Dow lost 299-points and we're starting to see a few cracks that indicate that it may be close to now or never for some indices. Bonds were down, so yields were up. The dollar rallied again, and the price of oil was down but found some support and reversed off the lows at its 50-day average.
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Mixed messages out of the Federal Reserve last week may have complicated an already uncertain situation. Fed Chairman Powell said that the Fed is not close to start tapering their bond buying policy, yet a day later St. Louis Fed President Bullard urged the Fed to start tapering. The next FOMC meeting is July 28, and that one could make for some interesting discussions, and market action.
We've seen some indices pull back a lot more than others recently, and the question is whether the downside has been sufficient in those that have been lagging. The Russell 2000 small cap index, for instance, is already 8.3% off its recent highs. Is that enough, or have valuations gotten so out of hand, that the market needs more of a washout to get itself out of bubble territory?
The problem with wrapping our heads around the clear signs that valuations have gotten too high is that momentum always seems to last longer than seems reasonable or possible. I think we lived through that since the rally started after the COVID crash in March 2020. So what are we looking for that could tell us when that speculative period may be coming closer to an end? The market internals could help.
As market internals weaken, it is a warning sign because, during periods of investor peculation, they tend to buy indiscriminately. Whether it's meme stocks, hot FAANG type stocks, or whatever - get me in at any price is the attitude during periods of speculation, regardless of valuations. Sound familiar? But once we see the internals deteriorate we know that indiscriminate buying may be coming to an end, and that may be what it takes to ignite the eventual bursting of a bubble.
On Friday we saw some selling again and in this case the internals were justifiably weak - almost 5 to 1 declining volume over advancing on the NYSE. It was not quite as bad on the Nasdaq, but there were another 125 new lows.
When these internals are negative when the stock indices are actually up, that's when we get the red flags, and we've actually seen that over recent months, and that is why the Dow, S&P 500, and Nasdaq are all just off all-time highs, while the Russell 2000, the S-fund's DWCPF, and the Dow Transportation Index are well below their highs as the weakness spreads under the surface.
That may be happening now but there are some reasons to believe that there is still time for the bulls. It's probably just a matter of time, but is now the time?
This chart of the NYSE cumulative advance-decline index hasn't really had any major breakdowns yet. It could happen this week, or it could take months. As you can see from prior major market declines, this A/D line tends to break before or along with the index, but it has not happened yet.
The same chart on the Nasdaq is still intact but there is one crack with the break of that red dashed line, but that happened a few months ago.
How about technology stocks specifically? Maybe a crack showing recently?
It's inevitable. Valuations are too lofty and this bubble is going to burst. As history suggests, it will happen again like it did in 1929, 1987, 2000, 2008, and just last year in 2020. The question is when, and will we be given enough warning to know when buying the dips will no longer work, and selling rallies will be the new strategy as we have seen throughout the last 100 years in the stock market?
The market hasn't given people in cash a lot of opportunities to buy in recent months. Is this recent dip an opportunity, or the start of the trouble? It's never easy. The "Last Look Report" subscribers can attest that as almost every day we see some members of our TSP Talk AutoTracker moving completely into stocks on any given day, while others are selling everything.
I did a lot of reading over the weekend and there sure seems to be a lot of doom and gloom talk out there. That's usually my job (doom and gloom), but when everyone seems to be on the same page, it rarely goes that way. Perhaps they are all right and they may lead a charge to the sell side from new investors who have only known bullish action since they started trading their stimulus checks at the bottom of the March 2020 crash. That group certainly has the ability to move the market the way they did with those meme stocks like Gamestop and AMC, so if they go into sell mode, watch out. That will be new territory.
There are a few charts that need some help right away to start the week, or risk breaking down technically including the Russell 2000, the Transportation Index, and the EAFE Index, or I-fund.
The S&P 500 (C-fund) pulled back from the recent highs made on Wednesday of last week, which happened to be exactly 100% off the March 2020 lows. The closing high was made last Monday as stocks struggled last week during a week that historically had done well over the years. Friday's pullback pushed the index all the way down near the 20-day EMA, which held earlier this month, and a few other times in recent months, but as you can see, a test of the 50-day EMA is also very possible. With earnings season kicking in, there is historically a "sell the news" reaction during this week in July, but after last week's weakness, perhaps investors were taking profits earlier this year before the seasonally bearish week.
The weekly S&P 500 chart doesn't show any technical damage whatsoever, but it does show just how extended it is, and how far it has come since the March 2020 low. As I mentioned, the high made a few days ago was a 100% move (2200 to 4400) off that low from 16 months.
The DWCPF (S-fund) has been struggling and the positive reversal failed last Monday at some stiff resistance (red arrow.) The Russell 2000 chart looks worse than this as it has already tested the lower support lines. Is that what is in store for this small cap chart, or can it hold on here? Tagging that support line near 2100 is possible, but prior tests rebounded quickly from there.
The EFA / I-fund went from new highs back on June 15th, to a nasty looking bear flag over the last month. The 50-day EMA had been holding for months on this chart but so far this month it has struggled to remain above it, and Friday's close was the lowest close since early May. The low on Friday did fill in an open gap, and there is an open gap up near 79.50.
The Dow Transportation Index has clearly run into trouble as this market leader broke down from its rising trading channel back in May. Since then it has been in a steady descending channel, and Friday's close was just the 2nd close below the 100-day EMA all year. Like many charts, it looks like now or never for the Transports if it wants to avoid a test of that 2900-day EMA down near 13,750.
The BND (bonds / F-fund) was down but closed well off the lows and found support at the top of that old ring channel. That looks to be the key area, and if bonds do continue to rally, I'm not sure what that says about our economy since yields are already at multi-month lows. For those who may not know, bond prices (and the F-fund) move counter to bond yields.
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... [url]www.tsptalk.com/premiums.html
[/URL]
To get weekly or daily notifications when we post new commentary, sign up HERE.
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.
[TABLE="align: center"]
[TR]
[TD="align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[TD]
[/TD]
[TD="width: 362, align: center"]
[/TR]
[/TABLE]
Mixed messages out of the Federal Reserve last week may have complicated an already uncertain situation. Fed Chairman Powell said that the Fed is not close to start tapering their bond buying policy, yet a day later St. Louis Fed President Bullard urged the Fed to start tapering. The next FOMC meeting is July 28, and that one could make for some interesting discussions, and market action.
We've seen some indices pull back a lot more than others recently, and the question is whether the downside has been sufficient in those that have been lagging. The Russell 2000 small cap index, for instance, is already 8.3% off its recent highs. Is that enough, or have valuations gotten so out of hand, that the market needs more of a washout to get itself out of bubble territory?
The problem with wrapping our heads around the clear signs that valuations have gotten too high is that momentum always seems to last longer than seems reasonable or possible. I think we lived through that since the rally started after the COVID crash in March 2020. So what are we looking for that could tell us when that speculative period may be coming closer to an end? The market internals could help.
As market internals weaken, it is a warning sign because, during periods of investor peculation, they tend to buy indiscriminately. Whether it's meme stocks, hot FAANG type stocks, or whatever - get me in at any price is the attitude during periods of speculation, regardless of valuations. Sound familiar? But once we see the internals deteriorate we know that indiscriminate buying may be coming to an end, and that may be what it takes to ignite the eventual bursting of a bubble.
On Friday we saw some selling again and in this case the internals were justifiably weak - almost 5 to 1 declining volume over advancing on the NYSE. It was not quite as bad on the Nasdaq, but there were another 125 new lows.
When these internals are negative when the stock indices are actually up, that's when we get the red flags, and we've actually seen that over recent months, and that is why the Dow, S&P 500, and Nasdaq are all just off all-time highs, while the Russell 2000, the S-fund's DWCPF, and the Dow Transportation Index are well below their highs as the weakness spreads under the surface.
That may be happening now but there are some reasons to believe that there is still time for the bulls. It's probably just a matter of time, but is now the time?
This chart of the NYSE cumulative advance-decline index hasn't really had any major breakdowns yet. It could happen this week, or it could take months. As you can see from prior major market declines, this A/D line tends to break before or along with the index, but it has not happened yet.
The same chart on the Nasdaq is still intact but there is one crack with the break of that red dashed line, but that happened a few months ago.
How about technology stocks specifically? Maybe a crack showing recently?
It's inevitable. Valuations are too lofty and this bubble is going to burst. As history suggests, it will happen again like it did in 1929, 1987, 2000, 2008, and just last year in 2020. The question is when, and will we be given enough warning to know when buying the dips will no longer work, and selling rallies will be the new strategy as we have seen throughout the last 100 years in the stock market?
The market hasn't given people in cash a lot of opportunities to buy in recent months. Is this recent dip an opportunity, or the start of the trouble? It's never easy. The "Last Look Report" subscribers can attest that as almost every day we see some members of our TSP Talk AutoTracker moving completely into stocks on any given day, while others are selling everything.
I did a lot of reading over the weekend and there sure seems to be a lot of doom and gloom talk out there. That's usually my job (doom and gloom), but when everyone seems to be on the same page, it rarely goes that way. Perhaps they are all right and they may lead a charge to the sell side from new investors who have only known bullish action since they started trading their stimulus checks at the bottom of the March 2020 crash. That group certainly has the ability to move the market the way they did with those meme stocks like Gamestop and AMC, so if they go into sell mode, watch out. That will be new territory.
There are a few charts that need some help right away to start the week, or risk breaking down technically including the Russell 2000, the Transportation Index, and the EAFE Index, or I-fund.
The S&P 500 (C-fund) pulled back from the recent highs made on Wednesday of last week, which happened to be exactly 100% off the March 2020 lows. The closing high was made last Monday as stocks struggled last week during a week that historically had done well over the years. Friday's pullback pushed the index all the way down near the 20-day EMA, which held earlier this month, and a few other times in recent months, but as you can see, a test of the 50-day EMA is also very possible. With earnings season kicking in, there is historically a "sell the news" reaction during this week in July, but after last week's weakness, perhaps investors were taking profits earlier this year before the seasonally bearish week.
The weekly S&P 500 chart doesn't show any technical damage whatsoever, but it does show just how extended it is, and how far it has come since the March 2020 low. As I mentioned, the high made a few days ago was a 100% move (2200 to 4400) off that low from 16 months.
The DWCPF (S-fund) has been struggling and the positive reversal failed last Monday at some stiff resistance (red arrow.) The Russell 2000 chart looks worse than this as it has already tested the lower support lines. Is that what is in store for this small cap chart, or can it hold on here? Tagging that support line near 2100 is possible, but prior tests rebounded quickly from there.
The EFA / I-fund went from new highs back on June 15th, to a nasty looking bear flag over the last month. The 50-day EMA had been holding for months on this chart but so far this month it has struggled to remain above it, and Friday's close was the lowest close since early May. The low on Friday did fill in an open gap, and there is an open gap up near 79.50.
The Dow Transportation Index has clearly run into trouble as this market leader broke down from its rising trading channel back in May. Since then it has been in a steady descending channel, and Friday's close was just the 2nd close below the 100-day EMA all year. Like many charts, it looks like now or never for the Transports if it wants to avoid a test of that 2900-day EMA down near 13,750.
The BND (bonds / F-fund) was down but closed well off the lows and found support at the top of that old ring channel. That looks to be the key area, and if bonds do continue to rally, I'm not sure what that says about our economy since yields are already at multi-month lows. For those who may not know, bond prices (and the F-fund) move counter to bond yields.
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... [url]www.tsptalk.com/premiums.html
[/URL]
To get weekly or daily notifications when we post new commentary, sign up HERE.
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.
