Stocks opened lower on Friday but the futures were already on the way up before the opening bell after an article in the Wall Street Journal came out suggesting the Fed may reconsider their rising interest rate plan. A rouse or real, we don't know, but it did stimulate the rally on Friday.
The Dow gained 749-points after being down triple digits near the open. Yields flipped over after making new highs, and the dollar reversed down as they have been joined at the hip, and that was the catalyst for the stock market rally on Friday. Now, can it continue into this week which will be the most important week for earnings so far as the FAANG companies report?
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So this article that came out before the opening bell on Friday suggested that the Fed may consider backing off after their next interest rate hike on November 2. That flipped the pre-market futures from deep losses into what we ended up seeing by Friday's closing bell.
Now, what does this mean? I'm speculating since I don't know anything for sure, but did they throw this out there to see what the reaction would be? We suspect that the Fed wants to see the stock market come down to earth as a way of controlling inflation, as well as hit the jobs market, but Friday's rally may have have shown them what they might expect if they do "pivot" to a slightly less hawkish stance on monetary policy / interest rates. In other words, they may not want to back off on rate hikes if the stock market is just going to surge higher. It could undo all of the work that they've done since that first rate hike in March.
The timing of the article was suspect since the Fed is now in their blackout period before the November 1st and 2nd FOMC meeting, so we won't hear any other comments from them between now and then. Of course, the paranoid trader in me is concerned that they threw that dovish article out there so that some larger financial intuitions can sell some positions at higher prices between now and the November 2nd meeting, and have more cash on hand for another leg down in the stock market after that FOMC meeting.
Who knows if that's actually true, but one thing everyone seems to believe is that this could trigger more upside - it was a bullish set up for this week, but to me it is tough to trust something when everyone is on the same page. I hope it does trigger a bigger rally, and I actually have a good TLT chart that may be telling us that is the case, but why do I feel like it's a trap?
I know I'm getting a little deep here and most of you reading this probably want more of the basics like is this a good time to buy, or sell - but it's this stuff that helps me make my decision, and hopefully it helps you to make your decision for what's best for your situation. I'd love to know the age disparity between our youngest and oldest readers because obviously these different groups probably should not be approaching the market and investing in the same way.
Let's get into some nuts and bolts.
The 10-year Treasury Yield was popping higher early in the day but the "pivot" article triggered a reversal in yields and bond prices, as well as the dollar. The strong dollar and higher yields have been leading the stock market lower this year, so this reversal helped stocks reverse as well.
Is this really a turning point or is my skepticism warranted? I may be misinterpreting something here, but this chart of the TLT, which is a longer term bond ETF, had a big spike in trading volume on Friday. Normally I would think nothing of this because it was an options expiration day and spikes are normal. But there does seem to be a pattern here after a spike in volume - a reversal and a temporary relief rally, even though the longer term trend remains down. So if bonds do rally, the stock market should follow along.
The weekly chart of the S&P 500 has been dancing around its 200-week moving average, and being such a widely followed indicator, it can have a self-fulfilling prophesy effect because the thought is, if everyone else is going to buy at this key support level, why shouldn't I? And the rally starts. But when that average breaks down, it can get bad... very bad. Just look at 2008, and even 2020 - although everything happened so quickly that year. But yes, everyone is watching that 200 week average.
In 2008 the S&P flirted with the average for a good half year before those who like to buy at that support gave up, and then it had a difficult time getting back above, and eventually caved.
This chart compares the trend that we have this year to the 2007 - 2008 market, which looks very similar. Those rallies from the bottom of the channel to the top are tremendous so I personally find it difficult to just stay on the sidelines and wait for the bear to go away. If the S&P happened to shoot to the top of that channel on Monday or this week, that would be a 19% gain off the recent intraday low of 3492. (These line charts only show the closing prices.)
So, we could be starting a nice bear market rally. But if we're wrong, here's how the chart above resolved itself in October of 2008 and beyond.
I'll remind you again, while not a primary indicator, the October seasonality chart shows weakness for most of this week, but strength on Friday and Monday to end the month.
Chart provided courtesy of www.sentimentrader.com
Most of the FAANG high profile, market moving type stocks will be reporting this week. Netflix started it off with a big rally after reporting last week. But this week Microsoft reports on Tuesday, Google (Alphabet) and Facebook (Meta) on Wednesday, followed by Apple and Amazon on Thursday. Here we go!
The S&P 500 (C-fund) has a lot of reasons to rally, particularly if the Fed pivot is truly embraced for more than Friday's one day wonder. There is a ton of resistance overhead between 3750 and 3900, but that's a lot of breathing room if it can break some of that resistance. Then there's the 200-day EMA at 4050 and the open gap up by 4070. So there's potential but it's not easy to trust rallies in the heart of a bear market. That blue bear flag is a troubling formation so it is vital that this gets above some of that overhead resistance quickly.
The small caps (S-fund) and International stocks (I-fund) have very similar chart formations so they are basically in the same boat, and a rising tide will lift them all. Of course a falling tide will also take them all down.
The BND (bonds / F-fund) had a nice reversal day on Friday when yields rolled over. I showed the TLT bond chart above and the same holds true here. There seems to be some relief in the bond market after a high trading volume day like we saw on Friday, even if it was only caused by an options expiration day. I would look for at least a move to the top of the channel unless there is some news that counters Friday's pivot rumor.
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.
The Dow gained 749-points after being down triple digits near the open. Yields flipped over after making new highs, and the dollar reversed down as they have been joined at the hip, and that was the catalyst for the stock market rally on Friday. Now, can it continue into this week which will be the most important week for earnings so far as the FAANG companies report?
[TABLE="align: center"]
[TR]
[TD="align: center"]
[TD]
[/TD]
[TD="width: 338, align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
So this article that came out before the opening bell on Friday suggested that the Fed may consider backing off after their next interest rate hike on November 2. That flipped the pre-market futures from deep losses into what we ended up seeing by Friday's closing bell.
Now, what does this mean? I'm speculating since I don't know anything for sure, but did they throw this out there to see what the reaction would be? We suspect that the Fed wants to see the stock market come down to earth as a way of controlling inflation, as well as hit the jobs market, but Friday's rally may have have shown them what they might expect if they do "pivot" to a slightly less hawkish stance on monetary policy / interest rates. In other words, they may not want to back off on rate hikes if the stock market is just going to surge higher. It could undo all of the work that they've done since that first rate hike in March.
The timing of the article was suspect since the Fed is now in their blackout period before the November 1st and 2nd FOMC meeting, so we won't hear any other comments from them between now and then. Of course, the paranoid trader in me is concerned that they threw that dovish article out there so that some larger financial intuitions can sell some positions at higher prices between now and the November 2nd meeting, and have more cash on hand for another leg down in the stock market after that FOMC meeting.
Who knows if that's actually true, but one thing everyone seems to believe is that this could trigger more upside - it was a bullish set up for this week, but to me it is tough to trust something when everyone is on the same page. I hope it does trigger a bigger rally, and I actually have a good TLT chart that may be telling us that is the case, but why do I feel like it's a trap?
I know I'm getting a little deep here and most of you reading this probably want more of the basics like is this a good time to buy, or sell - but it's this stuff that helps me make my decision, and hopefully it helps you to make your decision for what's best for your situation. I'd love to know the age disparity between our youngest and oldest readers because obviously these different groups probably should not be approaching the market and investing in the same way.
Let's get into some nuts and bolts.
The 10-year Treasury Yield was popping higher early in the day but the "pivot" article triggered a reversal in yields and bond prices, as well as the dollar. The strong dollar and higher yields have been leading the stock market lower this year, so this reversal helped stocks reverse as well.
Is this really a turning point or is my skepticism warranted? I may be misinterpreting something here, but this chart of the TLT, which is a longer term bond ETF, had a big spike in trading volume on Friday. Normally I would think nothing of this because it was an options expiration day and spikes are normal. But there does seem to be a pattern here after a spike in volume - a reversal and a temporary relief rally, even though the longer term trend remains down. So if bonds do rally, the stock market should follow along.
The weekly chart of the S&P 500 has been dancing around its 200-week moving average, and being such a widely followed indicator, it can have a self-fulfilling prophesy effect because the thought is, if everyone else is going to buy at this key support level, why shouldn't I? And the rally starts. But when that average breaks down, it can get bad... very bad. Just look at 2008, and even 2020 - although everything happened so quickly that year. But yes, everyone is watching that 200 week average.
In 2008 the S&P flirted with the average for a good half year before those who like to buy at that support gave up, and then it had a difficult time getting back above, and eventually caved.
This chart compares the trend that we have this year to the 2007 - 2008 market, which looks very similar. Those rallies from the bottom of the channel to the top are tremendous so I personally find it difficult to just stay on the sidelines and wait for the bear to go away. If the S&P happened to shoot to the top of that channel on Monday or this week, that would be a 19% gain off the recent intraday low of 3492. (These line charts only show the closing prices.)
So, we could be starting a nice bear market rally. But if we're wrong, here's how the chart above resolved itself in October of 2008 and beyond.
I'll remind you again, while not a primary indicator, the October seasonality chart shows weakness for most of this week, but strength on Friday and Monday to end the month.
Chart provided courtesy of www.sentimentrader.com
Most of the FAANG high profile, market moving type stocks will be reporting this week. Netflix started it off with a big rally after reporting last week. But this week Microsoft reports on Tuesday, Google (Alphabet) and Facebook (Meta) on Wednesday, followed by Apple and Amazon on Thursday. Here we go!
The S&P 500 (C-fund) has a lot of reasons to rally, particularly if the Fed pivot is truly embraced for more than Friday's one day wonder. There is a ton of resistance overhead between 3750 and 3900, but that's a lot of breathing room if it can break some of that resistance. Then there's the 200-day EMA at 4050 and the open gap up by 4070. So there's potential but it's not easy to trust rallies in the heart of a bear market. That blue bear flag is a troubling formation so it is vital that this gets above some of that overhead resistance quickly.
The small caps (S-fund) and International stocks (I-fund) have very similar chart formations so they are basically in the same boat, and a rising tide will lift them all. Of course a falling tide will also take them all down.
The BND (bonds / F-fund) had a nice reversal day on Friday when yields rolled over. I showed the TLT bond chart above and the same holds true here. There seems to be some relief in the bond market after a high trading volume day like we saw on Friday, even if it was only caused by an options expiration day. I would look for at least a move to the top of the channel unless there is some news that counters Friday's pivot rumor.
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.
