Stocks sold off early on Tuesday but mounted a strong comeback in late morning trading and the indices moved into positive territory before the BoE announced a bond warning to UK pension funds, and that sent stocks reeling. That's typical bear market action where any upside action is just a headline away from failing. But the early action may be a sign that the market is looking for a reason to rally, if the negative headlines can stay away for few days. The Dow closed with a small gain while the broader indices were flat to down. The Nasdaq lagged with a 1.1% loss, while bonds were down on higher yields.
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Because of the TSP holiday on Monday, the share prices above are the sum of Monday and Tuesday's market action.
The stocks market was actually rallying yesterday morning and into the afternoon before the Bank of England (the UK's central bank) shook things up telling UK pension funds they have three days to rebalance their positions because they will not continue their bond market support. That was disconcerting for the market because there's a good chance that this is impacting U.S. pension funds as well. When stocks and bonds fall together, it is tough to make any kind of a return, and with fixed income pension payments continuing to go out, where will the money come from if not from the government, who is already strapped as it is and any more spending means more inflation trouble?
The yield on the 10-year yield has been grinding back up toward 4% and the question is whether it can breakout, or if we get some kind of a double top pullback first.
Wednesday's PPI and Thursday's CPI report should be the big news of the week unless we get another surprise headline from some other source, and my concern is whether the reports send us a misdirection play similar to the FOMC rate hike in June did.
I say that because I noticed something interesting on the DWCPF chart (S-fund), which created a spinning top candlestick formation yesterday, and they tend to be good indicators of a change in direction coming - unless something gets in the way.
Here's the chart and those spinning tops, which are created when the chart opens and closes fairly close to each other, but there is a wide range during that day above and below that open / closing price creating tails on both sides. That happened yesterday, and you can see other spinning tops coming before a change in direction. Not necessarily the next day, but usually fairly quickly.
There was one that was created on June 15, which happened to be a Fed rate hike day. The following day saw a sell off, but that day was the low before the two month rally into August.
There was another spinning top on June 30th, which turned out to be the low of that pullback.
There was another on July 8th, and that was the peak before a week long pullback.
On August 16th, the peak of the summer rally, there was a formation that qualifies as a spinning top as well with the open and close being well between the high and lows of that day.
There were some that came close but not until yesterday do I see one that fits the description as well as the others.
So while the PPI and the CPI reports will do their thing to the market over the next two days, whether up or down, a technical argument could be made that we could have a move to the upside of week or more. And perhaps I would have to add as long as there isn't another major headline that spoils the trend.
The S&P 500 (C-fund) also had a spinning top formation formed, although maybe not as definitive as the one on the S-fund chart that I posted above. The morning rally took the S&P up to the old support line, where it failed, and it is so interesting when headlines come out right where the technical chart would suggest some trouble. The open gap above, and the descending resistance line near about 3740, could be a nice target area for a relief rally. The 50-day EMA near 3850 might be a good target for a bear market rally. Otherwise, we could see another inflation scare sell off, and that would likely trigger some high volume panic selling if we see lower lows.
The EFA (I-fund) lagged based on the BoE news from yesterday, and a small increase in the dollar.
The BND (bonds / F-fund) was up slightly as it is trying desperately to hang onto the recent lows, because there is not much support below that. Whether the 10-year Treasury Yield moves above 4% or pulls back from that level should determine whether this bounces or falls. 4% or more would break support here.
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Thanks so much for reading. We'll see you back here tomorrow.
Tom Crowley
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