The new week started with some profit taking after Friday's big rally in the large caps, while small caps (S-fund), the I-fund, and bonds (F-fund) tacked onto Friday's losses. The Dow was down sharply and it gave back all of Friday's gains, and then some while the S&P 500 and Nasdaq each gave back a small percentage of Friday's move higher. Bonds were down sharply as yields moved sharply higher for a second day following the unusually strong jobs report.
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It's been a tale of two markets for a few years now, and this year that dichotomy has continued. Bigger has been better, and smaller stocks have struggled from the weight of higher yields and a stronger dollar.
The 10-year Treasury Yield gapped up on Monday to add to Friday's move above 4%. It is now at some resistance but yesterday it hurdled back above the 200 and 50-day EMAs. Economic data continues to surprise to the upside and the strong employment data closed the door on the Fed's expected interest rate cut in March.
The dollar also gapped up. On Friday it filled an open gap from mid-November and now it is looking at the open gap from the November 2nd. This trend stalled I-fund which had been so close to breaking out last week.
The EFA (I-fund) teased us with a new high at the end of January and has since pulled back from what may have been a double top, but now it looks more like an inverted head and shoulders pattern. These formations tend to break out eventually but the dollar may have to lose its upside momentum before that happens.
While yields and the dollar are suggesting economic strength, the price of oil hasn't completely agreed. The price of oil can move on supply or demand so perhaps it is falling on over-supply right now, but demand may be down as well and that would be a sign of an economic slowdown. The bear flag formation is testing the breakdown support area right now.
The Dow Transportation Index is also very economically sensitive and it has enjoyed a strong rally off the October lows. It is nearing a longer-term descending resistance line, but it is a bullish looking formation. A break above the 16,000 for this market leader would give a confident boost to the bullish case for the stocks market.
We've talk about the indices being held up by the large tech Magnificent 7 stocks. Tesla has fallen by the way side this year being down almost 30% this year, but we saw what happened to Amazon and Meta last week after reporting earnings, but the chip monster Nvidia has been on fire and it doesn't report earnings until February 21.
These kinds of gains from the Mag 7 have magnified the relative strength of big tech and the S&P 500, over the struggling small caps this year.
The question here is whether small caps (DWCPF / S-fund) will play catch up when large tech digests those massive gains, or if they will struggle along with a big tech pullback?
It's a much quieter week despite earnings season still in full force. I mentioned Nvidia's earnings will be out in a couple of weeks, but in the interim the wave of less powerful earnings reports will be a tell for index valuations, however they are not market movers like the Mag 7.
The S&P 500 (C-fund) was down on Monday but it closed well above the lows, but also below the highs. Both the high and low of the day were inside Friday's high and low making it an "inside day" formation. These are indecision days but generally favorable toward the current trend, and in this case that would be up. There is clear overhead resistance but it is rising. A test of the bottom of that blue trading channel is always a possibility. That would be an ideal cleansing in the short-term but we know how the market likes to frustrate investors, especially those looking to buy a pullback on this strong chart.
DWCPF (S-fund) has shown us again that picking the right fund has been quite important over the last few years. This chart is now testing the bottom of a rising channel, and the 50-day EMA is not far below that so we have some lines in the sand here.
BND (bonds, F-fund) got slammed for a second straight day after making an intraday high over the December high last week. But, depending on how you draw your trend lines, a case can be made that this was coming back to test a breakout area. If this (and the 50-day EMA) can hold, I would suspect that the open gaps above would be targets of any rebound.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
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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It's been a tale of two markets for a few years now, and this year that dichotomy has continued. Bigger has been better, and smaller stocks have struggled from the weight of higher yields and a stronger dollar.
The 10-year Treasury Yield gapped up on Monday to add to Friday's move above 4%. It is now at some resistance but yesterday it hurdled back above the 200 and 50-day EMAs. Economic data continues to surprise to the upside and the strong employment data closed the door on the Fed's expected interest rate cut in March.
The dollar also gapped up. On Friday it filled an open gap from mid-November and now it is looking at the open gap from the November 2nd. This trend stalled I-fund which had been so close to breaking out last week.
The EFA (I-fund) teased us with a new high at the end of January and has since pulled back from what may have been a double top, but now it looks more like an inverted head and shoulders pattern. These formations tend to break out eventually but the dollar may have to lose its upside momentum before that happens.
While yields and the dollar are suggesting economic strength, the price of oil hasn't completely agreed. The price of oil can move on supply or demand so perhaps it is falling on over-supply right now, but demand may be down as well and that would be a sign of an economic slowdown. The bear flag formation is testing the breakdown support area right now.
The Dow Transportation Index is also very economically sensitive and it has enjoyed a strong rally off the October lows. It is nearing a longer-term descending resistance line, but it is a bullish looking formation. A break above the 16,000 for this market leader would give a confident boost to the bullish case for the stocks market.
We've talk about the indices being held up by the large tech Magnificent 7 stocks. Tesla has fallen by the way side this year being down almost 30% this year, but we saw what happened to Amazon and Meta last week after reporting earnings, but the chip monster Nvidia has been on fire and it doesn't report earnings until February 21.
These kinds of gains from the Mag 7 have magnified the relative strength of big tech and the S&P 500, over the struggling small caps this year.
The question here is whether small caps (DWCPF / S-fund) will play catch up when large tech digests those massive gains, or if they will struggle along with a big tech pullback?
It's a much quieter week despite earnings season still in full force. I mentioned Nvidia's earnings will be out in a couple of weeks, but in the interim the wave of less powerful earnings reports will be a tell for index valuations, however they are not market movers like the Mag 7.
The S&P 500 (C-fund) was down on Monday but it closed well above the lows, but also below the highs. Both the high and low of the day were inside Friday's high and low making it an "inside day" formation. These are indecision days but generally favorable toward the current trend, and in this case that would be up. There is clear overhead resistance but it is rising. A test of the bottom of that blue trading channel is always a possibility. That would be an ideal cleansing in the short-term but we know how the market likes to frustrate investors, especially those looking to buy a pullback on this strong chart.
DWCPF (S-fund) has shown us again that picking the right fund has been quite important over the last few years. This chart is now testing the bottom of a rising channel, and the 50-day EMA is not far below that so we have some lines in the sand here.
BND (bonds, F-fund) got slammed for a second straight day after making an intraday high over the December high last week. But, depending on how you draw your trend lines, a case can be made that this was coming back to test a breakout area. If this (and the 50-day EMA) can hold, I would suspect that the open gaps above would be targets of any rebound.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
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.
