After six positive days in a row, stocks ended the week on a sour note with some modest losses on Friday, but overall it was a solid week for the stock market. It was a quadruple witching expiration Friday so trading volume was very high, and sometimes that leads to a change in direction for stocks, at least temporarily. Bonds were down as yields moved up as the market tries to decide if higher interest rates are coming, or if a weakening economy will bring them lower again.
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The recent upward momentum is a buy and holders' delight as they make money almost every day. It's the kind of momentum tends tends to give market timers all kinds of trouble since there are many, many indications that stocks have come too far, too fast and need some kind of pullback. But in defense of the bulls, the S&P 500 is basically where it was in mid-2021, early and mid-2022, and now again in 2023, so it has actually been consolidating for a couple of years. It's the short-term that shows some extremes.
A lot has happened between the summer of 2021 and now including inflation, rapidly rising interest rates, and a recession watch, and the market has been trying to digest all of this information.
Can the market keep going higher? Sure, if the Fed does put the breaks on rate hikes this year and we avoid a hard landing recession, the market can then price that better news in.
The vertical lines on the chart above represent the quarterly quadruple witching expiration Fridays where trading volume spikes as futures and options contracts expire and roll into the next month or quarter. What I am pointing out is that often - not always - there can be a shift in direction after one these high trading volume expiration Fridays that happen four times each year.
In that chart it actually looks like more lows are created than peaks, but clearly, after what has happened since the prior expiration day in March, we are not at any kind of low short-term right now.
The dollar and yields have a lot of influence on the stock market and the recent pullback in the dollar (UUP) has been part of the catalyst for stocks and actually many things that are priced in dollars. The I-fund happens to highly influenced by the dollar as it bottomed the same day the UUP chart peaked, on May 31. There are open gaps on both charts that could influence the short-term direction, but the main question here is if the dollar has peaked, or if it is just pulling back within its larger ascending trend?
This longer-term chart of the dollar shows some support coming up from underneath it.
The Yield on the 10-year was rising throughout 2022 as the Fed raised interest rates. It may be more correct to say that the Fed may be following yields because they do tend to watch, and keep up with, the 2-year Treasury Yield. But this chart of the 10-year T-note is in a clear bull flag (blue), and it is quite large. Bull flags tend to break upwards, but in the short term it could always retest the lower end of the flag again before breaking out.
A breakout in yields could send mixed messages. Yields move higher when the economy is strong and / or the Fed is trying to slow down inflation. They tend to fall when the economy is slowing and the Fed may be trying to stimulate it by making money cheaper. So a breakout above that bull flag could be a sign that the economy is growing, or it could mean the bond market is expecting higher interest rates from the Fed down the road, perhaps in an effort to continue to control inflation. Which is it? Maybe both? And if so, will stocks love or hate this?
One last time on the seasonality issue -- the week after options expiration in June has one of the worst records of the year, although nowhere does it say stocks are down 100% of the time this week. It's just a seasonal headwind.
Chart provided courtesy of www.sentimentrader.com
It's a slow week for economic data so the market will be on the lookout for other catalysts.
The S&P 500 (C-fund) consolidated in April but for the mast part it has gone sharply higher since the March low - which happened to be about the time of the previous quadruple witching expiration Friday. That's a 16% gain in 3 months. We've seen stranger things before, like the rally in 2020 after the COVID crash, but this looks like it may be close to being due for at least a pause. At just over 4400, the bet is whether 4500 or 4300 will get hit first from here?
The DWCPF (S-fund) broke out above that March peak last week, but on Friday it closed back below it, although just barely. The easy money looks like it may have been made here already, but that tricky market doesn't like to make things easy on us so we won't hear any bell ringing at the top. It will either keep going or slam down, just to catch people off guard and unsure of what to do. There is still a large open gap all the way down near 1660, and that will keep the bulls antsy as they know it could get filled as gaps tend to do.
BND (Bonds / F-fund) has been moving sideways this month. Depending on how you look at it and your time frame, it could be making a possible bull flag, or a larger bear flag. The immediate key for bonds (BND) is that it is needs to get back above the 50 and 200-day EMA's. The question is whether you think yields are more likely to go up or down, then you can expect the F-fund to move in the opposite direction. An open gap was filled on Friday, but there is a possible gap that still needs filled near 72.40.
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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[TD="width: 338, align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
The recent upward momentum is a buy and holders' delight as they make money almost every day. It's the kind of momentum tends tends to give market timers all kinds of trouble since there are many, many indications that stocks have come too far, too fast and need some kind of pullback. But in defense of the bulls, the S&P 500 is basically where it was in mid-2021, early and mid-2022, and now again in 2023, so it has actually been consolidating for a couple of years. It's the short-term that shows some extremes.
A lot has happened between the summer of 2021 and now including inflation, rapidly rising interest rates, and a recession watch, and the market has been trying to digest all of this information.
Can the market keep going higher? Sure, if the Fed does put the breaks on rate hikes this year and we avoid a hard landing recession, the market can then price that better news in.
The vertical lines on the chart above represent the quarterly quadruple witching expiration Fridays where trading volume spikes as futures and options contracts expire and roll into the next month or quarter. What I am pointing out is that often - not always - there can be a shift in direction after one these high trading volume expiration Fridays that happen four times each year.
In that chart it actually looks like more lows are created than peaks, but clearly, after what has happened since the prior expiration day in March, we are not at any kind of low short-term right now.
The dollar and yields have a lot of influence on the stock market and the recent pullback in the dollar (UUP) has been part of the catalyst for stocks and actually many things that are priced in dollars. The I-fund happens to highly influenced by the dollar as it bottomed the same day the UUP chart peaked, on May 31. There are open gaps on both charts that could influence the short-term direction, but the main question here is if the dollar has peaked, or if it is just pulling back within its larger ascending trend?
This longer-term chart of the dollar shows some support coming up from underneath it.
The Yield on the 10-year was rising throughout 2022 as the Fed raised interest rates. It may be more correct to say that the Fed may be following yields because they do tend to watch, and keep up with, the 2-year Treasury Yield. But this chart of the 10-year T-note is in a clear bull flag (blue), and it is quite large. Bull flags tend to break upwards, but in the short term it could always retest the lower end of the flag again before breaking out.
A breakout in yields could send mixed messages. Yields move higher when the economy is strong and / or the Fed is trying to slow down inflation. They tend to fall when the economy is slowing and the Fed may be trying to stimulate it by making money cheaper. So a breakout above that bull flag could be a sign that the economy is growing, or it could mean the bond market is expecting higher interest rates from the Fed down the road, perhaps in an effort to continue to control inflation. Which is it? Maybe both? And if so, will stocks love or hate this?
One last time on the seasonality issue -- the week after options expiration in June has one of the worst records of the year, although nowhere does it say stocks are down 100% of the time this week. It's just a seasonal headwind.
Chart provided courtesy of www.sentimentrader.com
It's a slow week for economic data so the market will be on the lookout for other catalysts.
The S&P 500 (C-fund) consolidated in April but for the mast part it has gone sharply higher since the March low - which happened to be about the time of the previous quadruple witching expiration Friday. That's a 16% gain in 3 months. We've seen stranger things before, like the rally in 2020 after the COVID crash, but this looks like it may be close to being due for at least a pause. At just over 4400, the bet is whether 4500 or 4300 will get hit first from here?
The DWCPF (S-fund) broke out above that March peak last week, but on Friday it closed back below it, although just barely. The easy money looks like it may have been made here already, but that tricky market doesn't like to make things easy on us so we won't hear any bell ringing at the top. It will either keep going or slam down, just to catch people off guard and unsure of what to do. There is still a large open gap all the way down near 1660, and that will keep the bulls antsy as they know it could get filled as gaps tend to do.
BND (Bonds / F-fund) has been moving sideways this month. Depending on how you look at it and your time frame, it could be making a possible bull flag, or a larger bear flag. The immediate key for bonds (BND) is that it is needs to get back above the 50 and 200-day EMA's. The question is whether you think yields are more likely to go up or down, then you can expect the F-fund to move in the opposite direction. An open gap was filled on Friday, but there is a possible gap that still needs filled near 72.40.
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.
