I hope you enjoyed your three day weekend, and a lot has happened since my Thursday commentary which came out before the CPI report on Thursday morning. The CPI was showing a slightly smaller increase in consumer prices than was anticipated. The Dow gained about 1200-points that day and then tacked on another 32-points on Friday. The broader markets did even better on Friday with a near 1% gain in the S&P 500 after Friday's historic gain. Yields and the dollar were tanking on the news, although the bond market was closed on Friday because of the holiday.
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The question of course is, was the slightly better than expected CPI a real game changer or just a short term opportunity for the another bear market rally? By the looks of the reaction you would think Wall Street is convinced that inflation is behind us and we can start buying indiscriminately. Maybe they are right, and I admit I don't have anything but conjecture and some technical analysis to dispute any of it, so I'll put some of my concerns here.
What really happened was that the CPI decreased the chances that the Fed will raise interest rates by 0.75% at their December FOMC meeting. But, they will raise the rate. A month ago, the odds of a 0.75% hike was about 62%. A week ago it was 39%. Now it's just 19%. The chances of a 0.50% hike went from 62% last week to 81% after that CPI report. So, they are still raising interest rates making it tough for me to get overly excited about this recent CPI number, which could turn out to be a one off report that rebounds next month again, although there is some evidence that this won't be the case.
If we go back to the last inflationary period of the 70's and 80's we can see that nothing happened in a straight line. Over the course of 11 years from 1972 to 1982 inflation went from the under 4% to 8% to 12%, then down again, up again to even higher levels in 1979.
Chart source: https://www.macrotrends.net/2497/historical-inflation-rate-by-year, analysis by tsptalk
This is what the Fed seems concerned about. They don't want to repeat the mistake of the 70's by turning dovish after one positive looking CPI report. The change from 8.2% in September to 7.7% in October was meaningful but lets be honest, 7.7% instead of the expected 7.9% seems like the reaction may have been overly optimistic when we know these numbers do not move in one direction as soon as we see one that is a little better than expected.
In the 70's and 80's the Fed was raising and decreasing interest rates as the economy dictated and this chart shows that when they did increase interest rates rapidly like they are doing now, a recession eventually followed. When looking at the chart above in conjunction with this chart below, it also shows that by dropping rates during the recessions that inflation came back, so this inflation / high interest rate problem is far from over just because one CPI report which was 2/10's of a percent below estimates.
Chart source: https://www.macrotrends.net/2015/fed-funds-rate-historical-chart, analysis by tsptalk
We know that the strong dollar and higher yields have been putting pressure on the stock market so this chart shows why investors got excited last week. The bond market was closed on Friday so that's why there was no action on this top chart that day, but you can see what happened to the dollar on Thursday and Friday.
Investors have been clamoring for an excuse to buy and they have done so, and one of the reasons that it was so explosive was because so many people were leaning on the bearish side and there as a lot of money on the sidelines. Plus, if bearish investors were shorting the market by betting against it, they were forced to buy last week in order to get out of those positions, adding to the buying action.
Let's admit as market timers that it is sexier to be bearish and be correct than to be bullish and correct. Every Tom, Dick, and Harry - mom / pop, buy and hold investor will make money in a bull market or when stocks go up like they did to end last week. But if stocks flip back over this week, it's the person who made the money, sold the rally, and held those gains that looks like the genius.
I have been bearish and did not make that money last week. By the nature of our TSP rules I would have had to roll the dice to buy into the market before that crucial CPI report, which I did not, so I missed out. But now what?
Maybe there is more upside left in this rally, but the bear market is still here until we see evidence that the longer term trend has changed. You can see here on the weekly chart that it has not, but maybe 4050 - 4100 is possible before a serious test begins. We just don't know yet.
If you're in stocks should you sell? If you missed the rally, should you chase? My very simplistic thought would be that we should probably respect the bear market and anticipate an eventually turn back around to the downside, and if it doesn't and resistance gets taken out, we would know soon enough whether we should shift from a bear market approach to a new bull market approach. There's not a lot on the calendar that might stop the new upside momentum, but all it would take is an unexpected headline, although that's true of any rally.
The S&P 500 (C-fund) blasted above the bear flag on Friday. It was a holiday and I normally wouldn't trust a breakout on a light volume trading day when the bond market was closed, but the trading volume was actually pretty healthy on Friday. The 200-day moving average is about 90-points above Friday's close and that's where the summer rally ran into some trouble in August. There's a large gap down near 3800 that will be on the minds of many technical analysts as a possible pullback target so we'll also having to be looking over our shoulder at that level as long as that gap stays open. The PMO indicator looks good as it moved back to the upside and is also back above the -0- line.
The DWCPF (small caps / S-fund) also moved above its bear flag so technical analysis was no obstacle during the 2-day - get me in at any cost - rally. The CPI opened a large gap on most of the charts last Thursday, and this one is down near 1600, and there was also a small one opened on Friday near 1675.
The EFA (I-fund) has been signaling some strength longer than the U.S. market with the dollar peaking earlier this month. The breakdown last week kicked the I-fund into another gear and it is already over its 200-day EMA and it closed slightly above the 200-day simple moving average. This is quite interesting and not something I would have expected to see. Let's see if it becomes the roadmap for the US stock indices.
BND (bonds / F-fund) exploded on the drop in yields after the CPI. The chart shows some resistance in the current area coming off the August highs, but it blasted through the shorter term resistance on Thursday. Of course that opened a huge gap that will likely draw some attention at some point.
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. 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.
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The question of course is, was the slightly better than expected CPI a real game changer or just a short term opportunity for the another bear market rally? By the looks of the reaction you would think Wall Street is convinced that inflation is behind us and we can start buying indiscriminately. Maybe they are right, and I admit I don't have anything but conjecture and some technical analysis to dispute any of it, so I'll put some of my concerns here.
What really happened was that the CPI decreased the chances that the Fed will raise interest rates by 0.75% at their December FOMC meeting. But, they will raise the rate. A month ago, the odds of a 0.75% hike was about 62%. A week ago it was 39%. Now it's just 19%. The chances of a 0.50% hike went from 62% last week to 81% after that CPI report. So, they are still raising interest rates making it tough for me to get overly excited about this recent CPI number, which could turn out to be a one off report that rebounds next month again, although there is some evidence that this won't be the case.
If we go back to the last inflationary period of the 70's and 80's we can see that nothing happened in a straight line. Over the course of 11 years from 1972 to 1982 inflation went from the under 4% to 8% to 12%, then down again, up again to even higher levels in 1979.
Chart source: https://www.macrotrends.net/2497/historical-inflation-rate-by-year, analysis by tsptalk
This is what the Fed seems concerned about. They don't want to repeat the mistake of the 70's by turning dovish after one positive looking CPI report. The change from 8.2% in September to 7.7% in October was meaningful but lets be honest, 7.7% instead of the expected 7.9% seems like the reaction may have been overly optimistic when we know these numbers do not move in one direction as soon as we see one that is a little better than expected.
In the 70's and 80's the Fed was raising and decreasing interest rates as the economy dictated and this chart shows that when they did increase interest rates rapidly like they are doing now, a recession eventually followed. When looking at the chart above in conjunction with this chart below, it also shows that by dropping rates during the recessions that inflation came back, so this inflation / high interest rate problem is far from over just because one CPI report which was 2/10's of a percent below estimates.
Chart source: https://www.macrotrends.net/2015/fed-funds-rate-historical-chart, analysis by tsptalk
We know that the strong dollar and higher yields have been putting pressure on the stock market so this chart shows why investors got excited last week. The bond market was closed on Friday so that's why there was no action on this top chart that day, but you can see what happened to the dollar on Thursday and Friday.
Investors have been clamoring for an excuse to buy and they have done so, and one of the reasons that it was so explosive was because so many people were leaning on the bearish side and there as a lot of money on the sidelines. Plus, if bearish investors were shorting the market by betting against it, they were forced to buy last week in order to get out of those positions, adding to the buying action.
Let's admit as market timers that it is sexier to be bearish and be correct than to be bullish and correct. Every Tom, Dick, and Harry - mom / pop, buy and hold investor will make money in a bull market or when stocks go up like they did to end last week. But if stocks flip back over this week, it's the person who made the money, sold the rally, and held those gains that looks like the genius.
I have been bearish and did not make that money last week. By the nature of our TSP rules I would have had to roll the dice to buy into the market before that crucial CPI report, which I did not, so I missed out. But now what?
Maybe there is more upside left in this rally, but the bear market is still here until we see evidence that the longer term trend has changed. You can see here on the weekly chart that it has not, but maybe 4050 - 4100 is possible before a serious test begins. We just don't know yet.
If you're in stocks should you sell? If you missed the rally, should you chase? My very simplistic thought would be that we should probably respect the bear market and anticipate an eventually turn back around to the downside, and if it doesn't and resistance gets taken out, we would know soon enough whether we should shift from a bear market approach to a new bull market approach. There's not a lot on the calendar that might stop the new upside momentum, but all it would take is an unexpected headline, although that's true of any rally.
The S&P 500 (C-fund) blasted above the bear flag on Friday. It was a holiday and I normally wouldn't trust a breakout on a light volume trading day when the bond market was closed, but the trading volume was actually pretty healthy on Friday. The 200-day moving average is about 90-points above Friday's close and that's where the summer rally ran into some trouble in August. There's a large gap down near 3800 that will be on the minds of many technical analysts as a possible pullback target so we'll also having to be looking over our shoulder at that level as long as that gap stays open. The PMO indicator looks good as it moved back to the upside and is also back above the -0- line.
The DWCPF (small caps / S-fund) also moved above its bear flag so technical analysis was no obstacle during the 2-day - get me in at any cost - rally. The CPI opened a large gap on most of the charts last Thursday, and this one is down near 1600, and there was also a small one opened on Friday near 1675.
The EFA (I-fund) has been signaling some strength longer than the U.S. market with the dollar peaking earlier this month. The breakdown last week kicked the I-fund into another gear and it is already over its 200-day EMA and it closed slightly above the 200-day simple moving average. This is quite interesting and not something I would have expected to see. Let's see if it becomes the roadmap for the US stock indices.
BND (bonds / F-fund) exploded on the drop in yields after the CPI. The chart shows some resistance in the current area coming off the August highs, but it blasted through the shorter term resistance on Thursday. Of course that opened a huge gap that will likely draw some attention at some point.
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. 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.
