Stocks were down modestly on Friday, but it was the failure of an early rally, and the dramatic selling in the final half hour that was concerning. The Dow lost 107-points and the Nasdaq was basically flat which, in comparison to recent days, wasn't all that bad, but again we are seeing selling of rallies right now, and the question is how long will that approach continue? Bonds rallied on a pullback in yields, which was helping the stock market early on until that late selling.
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There is always a lot going on this time of year and another possible government shutdown next week may or may not be a catalyst. We've seen this movie before and we have all but become numb to the games being played in DC regarding budgets, spending, and pork getting stuffed into these bills. It's usually just a matter of time, compromising and capitulating to demands to get personal spending initiatives into the bills, and normally, it's over just in time. This time the compromising seems a little less certain, but is the stock market buying the drama?
You would think, based on the bearish action recently that DC is holding the market hostage, but there's other things going on between the Fed's hawkish monetary policy, poor seasonality, higher yields, and a strong dollar that is acting like an anchor to the market.
The 10-year Treasury Yield moved up to new highs as we saw a breakout on the weekly chart last week.
The dollar has also been relentlessly rising with 10 straight weeks of gains, and you can see a negative correlation between the dollar and the S&P 500. A strong dollar weighs on the price of stocks, and basically anything priced in dollars.
It was a rough week for the stock funds but the I-fund has been showing some surprising relative strength lately, despite that strength in the dollar. The I-fund was down 1.96% last week and down 2.12% for the month, but if we compare that the to the C (-2.91% and -4.09%) and the S-fund (-3.68% and -5.62%) there are signs that we may be seeing a shift. And if the dollar will ever start to weaken, that advantage may be magnified.
The I-fund chart is on the brink of either major breakdown, or yet another bounce off of the 200-day EMA as we have seen a couple of times already this year. The bear flag is concerning and may be the formation prior to a breakdown, since prior lows were more "V" like with rapid bounces, rather than this churning near support as we have been seeing lately.
Here are a few of the major players in the I-fund with the chart of the German, French, and Japanese stock markets, which are all near major support or, in case of the Japanese Nikkei, consolidating in a large bullish flag.
The Nikkei could come down to test the bottom of that flag again, but over all that is a longer term bullish sign, and Japan makes up about 10% of the I-fund.
But will the dollar weaken if the Fed keeps reducing their balance sheet as quantitative tightening continues? This is helping with inflation but it is also strengthening the dollar, and the trend is showing no signs of slowing down after another $75 billion reduction last week. What might change this, unfortunately, would be a economic issue, whether that's weaker economic data, a something more specific like another banking crisis like we saw in March.
I haven't used the I-fund much over the last few years and the chart above may be trying to tell us to continue to avoid it, but the I-fund chart and the other European and Asian charts are more compelling.
As for the S&P 500, it has been in a funk for the last 6 or 7 weeks, but the chart still remains in a longer term positive trend. There is support between the bottom of the rising red channel, which is near 4250, and the 200-day EMA, which is at 4264, so at 4320 currently, there could be more downside wiggle room in the short term without killing that longer term positive trend off the October 2022 lows.
The large cap tech stocks index is also flirting with major support. Is this a place to be buying those FAANG type of stocks again like in March, or will it be different this time?
Rising oil prices has been an issue and while it closed off of Tuesday's highs, it did close above $90 a barrel on Friday.
We have a busy economic calendar this week with the PCE and Personal Spending reports being the highlight on Friday, but we get Consumer Confidence, Consumer Sentiment, New Home Sales, and Q3 GDP numbers as well.
The S&P 500 (C-fund) had a bad week as it fell below some key support levels, and made a new lower low below the head and shoulders pattern that we watched form. I was hopeful that the neckline could hold, but the Fed's hawkishness was too much for that support. This looks troubling for the short-term but most of the longer term charts, like the S&P 500 chart I posted above, suggest this is just a pullback and churning within a rising trend / channel. The open gap near 4225 looks concerning but it would have to break below the 200-day EMA to get there, so 4264 would be the first test. And there is a large open gap near 4400 that could also get filled in the short-term, even if this pullback continues.
DWCPF (S-fund) looks the same, although it is in worse shape as far as it already being below its 200-day EMA. Higher interest rates are not the best environment for smaller companies which depend on financing much more than large companies do. There's an open gap above and below and if volatility continues, we could see both filled in the coming weeks.
BND (bonds / F-fund) rallied nicely on Friday as it partially filled the open gap from Thursday as the double bottom bounce tries to hold. Bonds are very oversold and apparently the China and other countries have been selling US bonds at an alarming rate. Perhaps an oversold bounce is due here, and that would take some pressure off the stock market if it happens?
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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[TD="align: center"]
[/TD]
[TD="width: 6%"]
[/TD]
[TD="width: 338, align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
There is always a lot going on this time of year and another possible government shutdown next week may or may not be a catalyst. We've seen this movie before and we have all but become numb to the games being played in DC regarding budgets, spending, and pork getting stuffed into these bills. It's usually just a matter of time, compromising and capitulating to demands to get personal spending initiatives into the bills, and normally, it's over just in time. This time the compromising seems a little less certain, but is the stock market buying the drama?
You would think, based on the bearish action recently that DC is holding the market hostage, but there's other things going on between the Fed's hawkish monetary policy, poor seasonality, higher yields, and a strong dollar that is acting like an anchor to the market.
The 10-year Treasury Yield moved up to new highs as we saw a breakout on the weekly chart last week.
The dollar has also been relentlessly rising with 10 straight weeks of gains, and you can see a negative correlation between the dollar and the S&P 500. A strong dollar weighs on the price of stocks, and basically anything priced in dollars.
It was a rough week for the stock funds but the I-fund has been showing some surprising relative strength lately, despite that strength in the dollar. The I-fund was down 1.96% last week and down 2.12% for the month, but if we compare that the to the C (-2.91% and -4.09%) and the S-fund (-3.68% and -5.62%) there are signs that we may be seeing a shift. And if the dollar will ever start to weaken, that advantage may be magnified.
The I-fund chart is on the brink of either major breakdown, or yet another bounce off of the 200-day EMA as we have seen a couple of times already this year. The bear flag is concerning and may be the formation prior to a breakdown, since prior lows were more "V" like with rapid bounces, rather than this churning near support as we have been seeing lately.
Here are a few of the major players in the I-fund with the chart of the German, French, and Japanese stock markets, which are all near major support or, in case of the Japanese Nikkei, consolidating in a large bullish flag.
The Nikkei could come down to test the bottom of that flag again, but over all that is a longer term bullish sign, and Japan makes up about 10% of the I-fund.
But will the dollar weaken if the Fed keeps reducing their balance sheet as quantitative tightening continues? This is helping with inflation but it is also strengthening the dollar, and the trend is showing no signs of slowing down after another $75 billion reduction last week. What might change this, unfortunately, would be a economic issue, whether that's weaker economic data, a something more specific like another banking crisis like we saw in March.
I haven't used the I-fund much over the last few years and the chart above may be trying to tell us to continue to avoid it, but the I-fund chart and the other European and Asian charts are more compelling.
As for the S&P 500, it has been in a funk for the last 6 or 7 weeks, but the chart still remains in a longer term positive trend. There is support between the bottom of the rising red channel, which is near 4250, and the 200-day EMA, which is at 4264, so at 4320 currently, there could be more downside wiggle room in the short term without killing that longer term positive trend off the October 2022 lows.
The large cap tech stocks index is also flirting with major support. Is this a place to be buying those FAANG type of stocks again like in March, or will it be different this time?
Rising oil prices has been an issue and while it closed off of Tuesday's highs, it did close above $90 a barrel on Friday.
We have a busy economic calendar this week with the PCE and Personal Spending reports being the highlight on Friday, but we get Consumer Confidence, Consumer Sentiment, New Home Sales, and Q3 GDP numbers as well.
The S&P 500 (C-fund) had a bad week as it fell below some key support levels, and made a new lower low below the head and shoulders pattern that we watched form. I was hopeful that the neckline could hold, but the Fed's hawkishness was too much for that support. This looks troubling for the short-term but most of the longer term charts, like the S&P 500 chart I posted above, suggest this is just a pullback and churning within a rising trend / channel. The open gap near 4225 looks concerning but it would have to break below the 200-day EMA to get there, so 4264 would be the first test. And there is a large open gap near 4400 that could also get filled in the short-term, even if this pullback continues.
DWCPF (S-fund) looks the same, although it is in worse shape as far as it already being below its 200-day EMA. Higher interest rates are not the best environment for smaller companies which depend on financing much more than large companies do. There's an open gap above and below and if volatility continues, we could see both filled in the coming weeks.
BND (bonds / F-fund) rallied nicely on Friday as it partially filled the open gap from Thursday as the double bottom bounce tries to hold. Bonds are very oversold and apparently the China and other countries have been selling US bonds at an alarming rate. Perhaps an oversold bounce is due here, and that would take some pressure off the stock market if it happens?
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.
