Stocks started Friday morning with some gains as Thursday's big rally rolled over into the opening bell, with some help from a tamer than expected PCE Price report, which temporarily eased inflation concerns. But of course the speech from Federal Reserve Chair Jerome Powell changed all of that. By the close the Dow had fallen 1008-points and losses of 2.5% to nearly 4% permeated the indices. That was enough to push the S&P 500 into negative territory for the month of August with three trading days left. The question is, how are investors going to react to the abrupt reduction in stock prices? Are they going to be buying the new bargains, or is this a time to keep selling?
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After many years of a Federal Reserve that has had the back of the stock market with interest rates of near 0% and a balance sheet that consistently increased giving the economy plenty of liquidity, the Fed is now demonstratively telling investors that interest rates are going higher, even if there is a recession. This was a wake up call on Friday for all of those who thought the Fed had pivoted a couple of weeks ago from their hawkish position.
Since the start of the COVID pandemic, the Fed has doubled its balance sheet to $8.8 trillion to keep interest rates low and sustain the economy and the housing market. They stopped buying securities this past March and next month they will be shrinking their balance sheet by $95 billion a month which will reduce it by about $1 trillion per year.
This is a different world from the one we lived in from 2009 until the start of this year. And, along with government spending, this has contributed to the biggest increase in inflation in 40 plus years. Now they have to get out of this mess, and it may not be pretty.
We commented on the positive action in stocks that led up to Friday's post Fed speech sell off, which had the feel of a set up to get investors to lean the wrong way. That was the case, but was Friday's selling over done?
I can't answer that but I look at the charts and for now they seems to suggest that there could be some more downside.
The weekly chart of the S&P 500 shows where the recent rally ran out of steam - at the 40-week moving average and the descending resistance line - and now it is below the 50-week EMA, and support is getting thin, so there are some vulnerabilities.
The price of oil, yields, and the dollar were some of the few things that were actually positive on Friday, and this isn't a new trend, and the combination was a bit of a warning sign that the stock market may be running into some headwinds.
It wasn't much but the yield on the 10-year Treasury was up, although it is off the recent highs. The dollar was down sharply as Powell was speaking, but it came back strong to close at its second highest level this year.
The price of oil was up just a half of a dollar but in the face of a positive dollar and the pressure being put on the economy from the Fed, and that's an impressive gain. It's mostly a supply issue now. Technically, it remains below the 200-day EMA but last week it moved above its 20-day EMA and descending resistance line for the first time in a few months, so something is shifting. This will be an interesting chart to watch in the coming weeks.
We'll get the August jobs report on Friday and estimates are looking for a gain of 300,000 jobs, which is well below the anomalous July reports 528K report, but still very positive for an economy that is supposed to be weakening. Economists believe the Fed needs to see signs that the jobs market is contracting in order to see inflation shrink. The unemployment rate was 3.5% last month, and this coming estimate is also 3.5% so they appear to have more work to do.
Does any of this sound like an environment where stock prices should thrive?
Admin Note: We will have another NFL Survivor Pool this year but we still have a couple of weeks. This is just a head's up and I will send a reminder next week. Here's some info for now.
The S&P 500 (C-fund) fell below that small head and shoulders pattern and just below the 50-day EMA again. Being below the 50-day EMA as well as both the 200-day SMA and 200-day EMA, is not usually a good situation for a chart, so the bulls' first job would be to get this back to the 4100 area. The PMO indicator on the bottom crossed below its moving average earlier last week, which was a warning sign so this chart has some issues.
DWCPF (S-fund / small caps) lost 3.3% on Friday but it was able to close above its 50-day EMA, which gives it some hope. If that doesn't hold, there are some areas of support just below that, but a trip to the bottom of the large channel would not be out of the question.
EFA (I-fund) got off a little easier than the U.S. indices with its 2.6% loss, probably because the overseas markets were closing before the afternoon losses mounted in the U.S. As I mentioned above, the dollar closed at its second highest level of the year on Friday, and a breakout to new highs for the dollar would certainly see this chart continue its decline below that resistance line.
BND (Bonds / F-fund) was down modestly on Friday as yields moved up on the Fed's resolve to keep raising rates. The once promising bull flag on this chart has turned more into a new trend downward, although short-term we could see the overhead gap try to get filled.
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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After many years of a Federal Reserve that has had the back of the stock market with interest rates of near 0% and a balance sheet that consistently increased giving the economy plenty of liquidity, the Fed is now demonstratively telling investors that interest rates are going higher, even if there is a recession. This was a wake up call on Friday for all of those who thought the Fed had pivoted a couple of weeks ago from their hawkish position.
Since the start of the COVID pandemic, the Fed has doubled its balance sheet to $8.8 trillion to keep interest rates low and sustain the economy and the housing market. They stopped buying securities this past March and next month they will be shrinking their balance sheet by $95 billion a month which will reduce it by about $1 trillion per year.
This is a different world from the one we lived in from 2009 until the start of this year. And, along with government spending, this has contributed to the biggest increase in inflation in 40 plus years. Now they have to get out of this mess, and it may not be pretty.
We commented on the positive action in stocks that led up to Friday's post Fed speech sell off, which had the feel of a set up to get investors to lean the wrong way. That was the case, but was Friday's selling over done?
I can't answer that but I look at the charts and for now they seems to suggest that there could be some more downside.
The weekly chart of the S&P 500 shows where the recent rally ran out of steam - at the 40-week moving average and the descending resistance line - and now it is below the 50-week EMA, and support is getting thin, so there are some vulnerabilities.
The price of oil, yields, and the dollar were some of the few things that were actually positive on Friday, and this isn't a new trend, and the combination was a bit of a warning sign that the stock market may be running into some headwinds.
It wasn't much but the yield on the 10-year Treasury was up, although it is off the recent highs. The dollar was down sharply as Powell was speaking, but it came back strong to close at its second highest level this year.
The price of oil was up just a half of a dollar but in the face of a positive dollar and the pressure being put on the economy from the Fed, and that's an impressive gain. It's mostly a supply issue now. Technically, it remains below the 200-day EMA but last week it moved above its 20-day EMA and descending resistance line for the first time in a few months, so something is shifting. This will be an interesting chart to watch in the coming weeks.
We'll get the August jobs report on Friday and estimates are looking for a gain of 300,000 jobs, which is well below the anomalous July reports 528K report, but still very positive for an economy that is supposed to be weakening. Economists believe the Fed needs to see signs that the jobs market is contracting in order to see inflation shrink. The unemployment rate was 3.5% last month, and this coming estimate is also 3.5% so they appear to have more work to do.
Does any of this sound like an environment where stock prices should thrive?
Admin Note: We will have another NFL Survivor Pool this year but we still have a couple of weeks. This is just a head's up and I will send a reminder next week. Here's some info for now.
The S&P 500 (C-fund) fell below that small head and shoulders pattern and just below the 50-day EMA again. Being below the 50-day EMA as well as both the 200-day SMA and 200-day EMA, is not usually a good situation for a chart, so the bulls' first job would be to get this back to the 4100 area. The PMO indicator on the bottom crossed below its moving average earlier last week, which was a warning sign so this chart has some issues.
DWCPF (S-fund / small caps) lost 3.3% on Friday but it was able to close above its 50-day EMA, which gives it some hope. If that doesn't hold, there are some areas of support just below that, but a trip to the bottom of the large channel would not be out of the question.
EFA (I-fund) got off a little easier than the U.S. indices with its 2.6% loss, probably because the overseas markets were closing before the afternoon losses mounted in the U.S. As I mentioned above, the dollar closed at its second highest level of the year on Friday, and a breakout to new highs for the dollar would certainly see this chart continue its decline below that resistance line.
BND (Bonds / F-fund) was down modestly on Friday as yields moved up on the Fed's resolve to keep raising rates. The once promising bull flag on this chart has turned more into a new trend downward, although short-term we could see the overhead gap try to get filled.
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.
