Stocks were choppy and mixed on Friday after a better than expected jobs report shocked Wall Street. You would think the headline would have been considered good news, but right now it's all about inflation and the Fed, and the strong employment data is not what the Fed wants to see. The Dow lost 46-points, the S&P 500 and Nasdaq were similarly flat, while small caps were down and the I-fund was up. Bonds were also down as yields spiked on the strong economic data.
[TABLE="align: center"]
[TR]
[TD="align: center"]
[/TD]
[TD]
[/TD]
[TD="width: 338, align: center"] Daily TSP Funds Return
[TABLE="align: center"]
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
We can talk growth or good earnings all we want but the Fed is the focal point for the stock market right now and if they are going to keep putting the pressure on interest rates, while continuing to tighten their balance sheet, there isn't really a good path forward for stocks. That is unless we believe that the 20% to 30% declines we have seen in the indices this year have already priced in the Fed's war against inflation.
Last week Fed Governor Christopher Waller pledged that the central bank won’t make the same mistakes on inflation that the Fed did in the 1970s. That is, in the early 70's the Fed raised rates, but backed off quickly once the economy started to slow, and inflation came back even worse in the years that followed. It was a near decade long debacle.
“We know what happened for the Fed not taking the job seriously on inflation in the 1970s, and we ain’t gonna let that happen,” Waller said.
“The labor market is strong. The economy is doing so well,” he said. “This is the time to hit it if you think there’s going to be any kind of negative reaction, because the economy can take it.” -- Source: https://www.cnbc.com
One month ago the chances of a 0.75% rate hike in July was 9.5%. Now it's 92.4%, with a 7.6% chance of a 1.0% rate hike. Friday's strong jobs report sounded like good news but not to the Fed who is desperately trying to tame inflation in lieu of a strong economy.
Source: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
So the question is, how much of this can the stocks market take, and is there any reason to be optimistic about the second half if this is their plan?
The yield on the 10-year Treasury Note is back up to 3.1%, and again, not what the market probably wants to see. There was a short pullback in June that investors hoped was a window of opportunity for the Fed to move to a more dovish stance on rates, but now this turnaround back up may change that. Below that we see the dollar pinned to its recent highs, which helped take down the price of many commodities in recent weeks including the price of oil, which may be of some relief, but last week we saw oil bounce back.
Oil is still in a short-term downtrend since its early June peak, but it bounced $10 off last week's low.
I saw this chart illustrated this weekend on a Ciovacco Capital video which shows the ratio of the shorter term VIX (Volatility Index) vs. the longer term VXV. Over the years going back to the financial crisis, most of the corrections / bear markets bottomed after we saw a spike in this ratio up to at least 1.25. So far in 2022 we haven't seen anything like that yet as it sits at 0.90.
All eyes will now be on the CPI report which will be released on Wednesday morning before the opening bell. On Thursday we will start seeing some major banks reporting second quarter earnings, but it won't be until the last week in July that we'll see the likes of Apple, Amazon, Microsoft, etc., reporting. July 27 is also the day we will hear from the Fe about rates hikes, so buckle up for late July!
The S&P 500 (C-fund) chart has a lot going on and the bulls and the bears could probably squint to see what they want to see on it. It's been almost a month since the lows in June and I am getting a little nervous as the bear flag develops (orange.) I put some arrows out there showing that we have see a 1 - 2 punch from the bulls during the current decline with the second one tending to be near a peak before the next leg lower. The open gap near 4000 looms overhead and the bulls are hoping for a fill there, but will the ever tricky market make it that easy for them? The 50-day EMA is currently at 3984.
The weekly chart has been doing a good job of holding above its 200-week EMA - for a 4th straight week, but the sideways actions creates yet another bear flag formation on the chart, and as you can see, the prior two bear flags broke to the downside. There's so much going on near 4000, including an open gap on the daily chart, that it wouldn't be much of a stretch to see that get hit, but that would also move to the top of the current bear flag so anticipating that could seem logical - but risky.
The DWCPF (S-fund) has a similar bear flag, an overhead open gap near 1700, and a long term descending trading channel. Is the low in or is this just another opportunity to sell a bear market rally?
EFA (I-fund) has already fallen below its bear flag but it has actually made its way back into the flag. It opened a small gap on the way near 61.50. Lots of overhead resistance but a possible bullish sign from the PMO (Price Momentum Oscillator) which is getting close to recapturing its moving average - something it did a couple of other times during relief rallies.
BND (Bonds / F-fund) was down again as the jobs report sent bond yields higher. This is finding itself at a very important juncture as it just filled in a small open gap on Friday while successfully holding, so far, that the old resistance line. It remains below the 50-day EMA again, however.
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 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.
[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]
We can talk growth or good earnings all we want but the Fed is the focal point for the stock market right now and if they are going to keep putting the pressure on interest rates, while continuing to tighten their balance sheet, there isn't really a good path forward for stocks. That is unless we believe that the 20% to 30% declines we have seen in the indices this year have already priced in the Fed's war against inflation.
Last week Fed Governor Christopher Waller pledged that the central bank won’t make the same mistakes on inflation that the Fed did in the 1970s. That is, in the early 70's the Fed raised rates, but backed off quickly once the economy started to slow, and inflation came back even worse in the years that followed. It was a near decade long debacle.
“We know what happened for the Fed not taking the job seriously on inflation in the 1970s, and we ain’t gonna let that happen,” Waller said.
“The labor market is strong. The economy is doing so well,” he said. “This is the time to hit it if you think there’s going to be any kind of negative reaction, because the economy can take it.” -- Source: https://www.cnbc.com
One month ago the chances of a 0.75% rate hike in July was 9.5%. Now it's 92.4%, with a 7.6% chance of a 1.0% rate hike. Friday's strong jobs report sounded like good news but not to the Fed who is desperately trying to tame inflation in lieu of a strong economy.
Source: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
So the question is, how much of this can the stocks market take, and is there any reason to be optimistic about the second half if this is their plan?
The yield on the 10-year Treasury Note is back up to 3.1%, and again, not what the market probably wants to see. There was a short pullback in June that investors hoped was a window of opportunity for the Fed to move to a more dovish stance on rates, but now this turnaround back up may change that. Below that we see the dollar pinned to its recent highs, which helped take down the price of many commodities in recent weeks including the price of oil, which may be of some relief, but last week we saw oil bounce back.
Oil is still in a short-term downtrend since its early June peak, but it bounced $10 off last week's low.
I saw this chart illustrated this weekend on a Ciovacco Capital video which shows the ratio of the shorter term VIX (Volatility Index) vs. the longer term VXV. Over the years going back to the financial crisis, most of the corrections / bear markets bottomed after we saw a spike in this ratio up to at least 1.25. So far in 2022 we haven't seen anything like that yet as it sits at 0.90.
All eyes will now be on the CPI report which will be released on Wednesday morning before the opening bell. On Thursday we will start seeing some major banks reporting second quarter earnings, but it won't be until the last week in July that we'll see the likes of Apple, Amazon, Microsoft, etc., reporting. July 27 is also the day we will hear from the Fe about rates hikes, so buckle up for late July!
The S&P 500 (C-fund) chart has a lot going on and the bulls and the bears could probably squint to see what they want to see on it. It's been almost a month since the lows in June and I am getting a little nervous as the bear flag develops (orange.) I put some arrows out there showing that we have see a 1 - 2 punch from the bulls during the current decline with the second one tending to be near a peak before the next leg lower. The open gap near 4000 looms overhead and the bulls are hoping for a fill there, but will the ever tricky market make it that easy for them? The 50-day EMA is currently at 3984.
The weekly chart has been doing a good job of holding above its 200-week EMA - for a 4th straight week, but the sideways actions creates yet another bear flag formation on the chart, and as you can see, the prior two bear flags broke to the downside. There's so much going on near 4000, including an open gap on the daily chart, that it wouldn't be much of a stretch to see that get hit, but that would also move to the top of the current bear flag so anticipating that could seem logical - but risky.
The DWCPF (S-fund) has a similar bear flag, an overhead open gap near 1700, and a long term descending trading channel. Is the low in or is this just another opportunity to sell a bear market rally?
EFA (I-fund) has already fallen below its bear flag but it has actually made its way back into the flag. It opened a small gap on the way near 61.50. Lots of overhead resistance but a possible bullish sign from the PMO (Price Momentum Oscillator) which is getting close to recapturing its moving average - something it did a couple of other times during relief rallies.
BND (Bonds / F-fund) was down again as the jobs report sent bond yields higher. This is finding itself at a very important juncture as it just filled in a small open gap on Friday while successfully holding, so far, that the old resistance line. It remains below the 50-day EMA again, however.
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 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.
