Stocks were up early on Thursday but buckled under the pressure of another rally in yields and the dollar, triggering algorithm selling. The Dow saw another modest loss of 90-points, again outperforming the broader indices, which is interesting since larger global companies tend to suffer more when the dollar is strong, as it is now. The rise in yields means bonds were down again, making new lows. The I-fund outperformed the C and S funds as it may have benefitted from the fact that the overseas markets were closing while US stocks were up in the morning.
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I could probably end the commentary there because that first paragraph said it all. Stocks have been stifled by rising yields and a strong dollar. OK, see you on Monday!
I guess the question is, why are yields and the dollar so strong right now? Obviously the Fed raising interest rates is a major factor but yields tend to lead the Fed so the bond market is now apparently pricing even higher interest rates from the Fed. But recently a lot of the rally in yields has been triggered by Fed Talk, and the Fed members seem to be so afraid of inflation getting out of control that they want the stock market to fall and the unemployment rate to go up. So right now they are pounding the table that things are bad, but many economists believe that they should consider stepping aside and see the results of the previous interest rate hikes before continuing.
Theses economists say that it takes 6 to 12 months to feel the effect of moves in the interest rates, and it has only been 7 months since the first rate hike. Since then they done 4 more for a total of 5 hikes. So, they are trying to put the breaks on the economy, and they will likely succeed, and right now the stock and bond markets are trying to price all of this in.
Yesterday's rally in the 10-year Treasury yield pushed it above the rising trading channel gain. That happened in September before they settled back into the channel, but here it goes again. Does than mean in a couple of days we will see a push lower here back into the channel? That would help the stock market.
The dollar is strong on the back of these higher yields in bonds, and that is really helping nobody except the bears, short sellers, and maybe the overseas currencies that are falling in relation to the dollar.
It may be a stretch but yesterday there were a couple of positive divergences if we look at the Volatility Index (VIX) and market breadth (advance / decline data.)
The VIX tends to go up when stocks are down and the moves are wider than normal, which was certainly the case yesterday. But the VIX was down 2.5% yesterday, and it actually fell below some longer term support. Interesting, but it may take another day or two of declines here to confirm this divergence.
The advance / decline ratio did show more declining stocks than advancing, but curiously the trading volume was about even between the advancers and the declining volume. Again, one day does not make a trend, but combined with the decline in the VIX, I thought this was interesting action.
Seasonality is usually very weak from the 22nd of October through the 27th. But because of the way the calendar fell this year with October 1st being a Saturday, it threw options expiration week off to one week later than normal. Options expiration week does tend to be bullish for stocks historically, and the S&P 500 is actually still up this week.
The bad news is, the week after options expiration in October tends to be pretty bad. I assume because there tends to be profit taking after a rally during options expiration week. But the catch here again is, we have a late post options week because of the way the calendar fell, and the last week of October tends to be very strong. So we have some mixed indications here.
Chart provided courtesy of www.sentimentrader.com
For the record, I only consider seasonality to be a primary indicator surrounding certain holidays that have undeniably good records over the years. This month is not one of those times.
I made a mess of the S&P 500 (C-fund) chart to try to get a feel for where the strongest support and resistance are, and with all of those converging lines, we can kind of see why it has been hanging around in this area for a while. I see a bear flag, which isn't good news, but the bears have had every opportunity to push this lower in recent weeks, and they haven't yet. Of course the indicators were so extreme on the negative side that I can see why it remained buoyant, so now it's the bulls' turn to decide if they have anything in the tank to buy this thing, or will they relent to the continued strength in yields, the dollar, and the pressure from the Fed's monetary policy?
The DWCPF (S-fund) is in the same boat but I will leave most of the lines off of it so you can get a different perspective. I will show the bearish looking flag which has my attention and concern.
The EFA (I-fund) held up OK, but as I mentioned above, that was likely because the US markets were up when the overseas markets closed. Other than that, the charts of the three TSP stock funds aren't all that different so they will likely continue to move in the same direction. But probably at slightly different rates.
The BND (bonds / F-fund) made another new low as the relentless rally in yields continues. It's very close the lower end of the channel so perhaps we'll see some short term relief, but there's a lot of work to do here before getting bullish on bonds.
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. Have a great weekend!
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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I could probably end the commentary there because that first paragraph said it all. Stocks have been stifled by rising yields and a strong dollar. OK, see you on Monday!
I guess the question is, why are yields and the dollar so strong right now? Obviously the Fed raising interest rates is a major factor but yields tend to lead the Fed so the bond market is now apparently pricing even higher interest rates from the Fed. But recently a lot of the rally in yields has been triggered by Fed Talk, and the Fed members seem to be so afraid of inflation getting out of control that they want the stock market to fall and the unemployment rate to go up. So right now they are pounding the table that things are bad, but many economists believe that they should consider stepping aside and see the results of the previous interest rate hikes before continuing.
Theses economists say that it takes 6 to 12 months to feel the effect of moves in the interest rates, and it has only been 7 months since the first rate hike. Since then they done 4 more for a total of 5 hikes. So, they are trying to put the breaks on the economy, and they will likely succeed, and right now the stock and bond markets are trying to price all of this in.
Yesterday's rally in the 10-year Treasury yield pushed it above the rising trading channel gain. That happened in September before they settled back into the channel, but here it goes again. Does than mean in a couple of days we will see a push lower here back into the channel? That would help the stock market.
The dollar is strong on the back of these higher yields in bonds, and that is really helping nobody except the bears, short sellers, and maybe the overseas currencies that are falling in relation to the dollar.
It may be a stretch but yesterday there were a couple of positive divergences if we look at the Volatility Index (VIX) and market breadth (advance / decline data.)
The VIX tends to go up when stocks are down and the moves are wider than normal, which was certainly the case yesterday. But the VIX was down 2.5% yesterday, and it actually fell below some longer term support. Interesting, but it may take another day or two of declines here to confirm this divergence.
The advance / decline ratio did show more declining stocks than advancing, but curiously the trading volume was about even between the advancers and the declining volume. Again, one day does not make a trend, but combined with the decline in the VIX, I thought this was interesting action.
Seasonality is usually very weak from the 22nd of October through the 27th. But because of the way the calendar fell this year with October 1st being a Saturday, it threw options expiration week off to one week later than normal. Options expiration week does tend to be bullish for stocks historically, and the S&P 500 is actually still up this week.
The bad news is, the week after options expiration in October tends to be pretty bad. I assume because there tends to be profit taking after a rally during options expiration week. But the catch here again is, we have a late post options week because of the way the calendar fell, and the last week of October tends to be very strong. So we have some mixed indications here.
Chart provided courtesy of www.sentimentrader.com
For the record, I only consider seasonality to be a primary indicator surrounding certain holidays that have undeniably good records over the years. This month is not one of those times.
I made a mess of the S&P 500 (C-fund) chart to try to get a feel for where the strongest support and resistance are, and with all of those converging lines, we can kind of see why it has been hanging around in this area for a while. I see a bear flag, which isn't good news, but the bears have had every opportunity to push this lower in recent weeks, and they haven't yet. Of course the indicators were so extreme on the negative side that I can see why it remained buoyant, so now it's the bulls' turn to decide if they have anything in the tank to buy this thing, or will they relent to the continued strength in yields, the dollar, and the pressure from the Fed's monetary policy?
The DWCPF (S-fund) is in the same boat but I will leave most of the lines off of it so you can get a different perspective. I will show the bearish looking flag which has my attention and concern.
The EFA (I-fund) held up OK, but as I mentioned above, that was likely because the US markets were up when the overseas markets closed. Other than that, the charts of the three TSP stock funds aren't all that different so they will likely continue to move in the same direction. But probably at slightly different rates.
The BND (bonds / F-fund) made another new low as the relentless rally in yields continues. It's very close the lower end of the channel so perhaps we'll see some short term relief, but there's a lot of work to do here before getting bullish on bonds.
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. Have a great weekend!
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.
