The stock and bond markets got another dose of good economic news as the relief of the latest CPI data gave investors another reason to believe that inflation may be under control. It's not falling, but going up less quickly, and that was enough to see new highs in the indices as investors can rule out any new rate hikes, and perhaps increase the chances of a rate cut in June. Bond yields and the dollar dropped sharply and that has been the recipe for a rally in the equities market.
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There's no doubt that the action has been bullish. The charts look good and investors are felling good, but that doesn't tell us what happens tomorrow or next week - just why stocks have been up in recent weeks.
I am not a fundamental analyst by any means so it's not the data that gets my attention as much as what the charts are doing, and there's no doubt the charts are going up and have momentum, they are acting like they are in a bull market, and they are making new highs. It's really all that matters, I suppose, to short-term traders. But market timers are also looking for reasons why the market might turn. I had seen plenty of them recently, but the upside momentum has been too strong to stop the train.
So when you see a headline like this one from CNBC yesterday, "CPI report shows inflation easing in April, with consumer prices still rising 3.4% from a year ago", what do you hear?
Inflation has been an issue for a couple of years now and as the headline says, prices are "still rising." Prices are not coming down, but compared to the extreme increases over the last year or two, they are not going up as quickly. The CPI was up 3.4% year over year, and the Core CPI, which does not include food and energy costs, was up 3.6% over last year's prices. The last time that happened, before the last couple of years, was more than 30 years ago. Today a 3.4% / 3.6% increase in prices triggered a big rally in the stock market. One red flag is that shelter (housing and rentals) was up 5.5% year over year, and that could weigh on the Fed's interest rate decision.
Of course for the stock market it is all relative to expectations, and that's why stocks went up because these numbers were a tick below expectations, so the market is attempting to price in this new number.
The CPI data most likely takes any thought of another interest rate hike off the table, but the big question is, will this figure be enough for the Fed to cut interest rates off the current levels? They are currently where they are, and near historic norms actually, because the Fed was trying to bring inflation down to their target of 2%. If they cut rates will that get them closer or further from 2% inflation? And if rates come down do you think that will move shelter prices up or down?
Cutting rates would more likely stimulate the economy and increase inflation, not decrease it. The Fed's biggest fear would be cutting rates and seeing inflation flare up again like in the 1970's and 80's. But cutting rates is not all the Fed can do. As I have talked about for months now, the Fed has been aggressively reducing their balance sheet and that does help inflation as much as a rate hike would, so that's good news for the economy, but maybe not for the stock market -- eventually, once the freight train loses momentum.
Stocks have been rising for one of the best reasons, because earnings have been coming in better than expected, but even with that the valuation investors like Warren Buffett are not seeing value in the stock market, as we talked about recently. But let's not forget that we came into this year with the expectation that the Fed could be cutting interest rates 6 or 7 times this year. Now we're debating if they will cut once. Granted, the reason that number has come down is because the lofty inflation numbers have come down, but unless the economy tanks, we may not see more than one rate cut anytime soon.
Anyway, here are the CPI and Core CPI charts for the last several decades, and while we see the trend coming down, prices are still rising faster than normal. Here's the current 3.4% rate of the CPI, and 3.6% Core CPI, compared to the last 50+ years.
Even after the dramatic decline, the CPI is rising faster than anytime since a blip in 2011, and for the Core CPI, faster than anytime since the early 1990's.
The 10-year Yield finally broke below the recent support and just yesterday I reminded everyone that flags on the bond charts haven't been working. Well, the market loves to prove me wrong and so yesterday that bear flag did break down so there goes that theory.
With the dollar falling sharply as well, the algorithms were buying as programmed. Yields down, stocks up. Dollar down, prices up. That's not always how it works, but that's what has been working for a couple of years now. Gold and silver were up big yesterday, oil was up, bitcoin was up over 7%. A weak dollar sends prices higher, and that's not good for inflation.
One warning sign may be coming from the Transportation Index. It created a negative outside reversal day on Tuesday (Turnaround Tuesday?) and yesterday it was only up 0.13%, badly lagging the broader market indices. On a positive note, the 50-day EMA held both days after breaking above it last week.
And how about the longer term chart of the S&P 500 - the weekly and monthly charts? I'll post them without commentary.
I do have some money in stocks right now, but in hindsight I have been underinvested based on the recent action, and these runaway bullish charts are very hard to trade unless you are willing to break one of the cardinal rules of "trading", which is to stay patient and not chase the market. As of yesterday that happens to be working. If I held 100% stocks right now I'd probably be looking to take a little money off the table to lock in some profits. If I held no stocks I might stay in cash or maybe buy a very small amount just to have some skin in the game and be patient with the bulk of my money.
A reminder that this is an options expiration week and volatility could easily creep in during these final two trading days, but also there is a tendency for the week following an expiration week to digest the gains or losses from expiration week. In this case that could mean some profit taking.
The S&P 500 (C-fund) continued its torrid pace after getting through the hot PPI data, and the cool CPI data. It looks like a good old fashion bull market, but even in bull market the action tends to breathe rather than go straight up. Below I illustrated how the S&P reacted after large one or more big up days. All of them this year, except the rally in mid-January, retraced most of those gains before resuming higher.
DWCPF (S-fund) gapped up and added another 1.1% yesterday. It is finally retracing that breakdown candlestick from April 1. Can it make new highs after having the run it has over the last few weeks, without some backing and filling first?
The EFA (I-fund) is certainly taking advantage of the correction in the dollar. There's a little more downside on the UUP chart before it fills the open gap from April.
BND (bonds / F-fund) broke out from its bull flag, something I said hadn't been the case in recent years on this chart as the flags had been breaking in the opposite direction from typical flag reactions. The gains yesterday were enough to fill in another overhead gap, and it broke above that red descending channel. The only open gaps now are on the downside.
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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[TD="width: 283, align: center"] Daily TSP Funds Return
[TR]
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[/TR]
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There's no doubt that the action has been bullish. The charts look good and investors are felling good, but that doesn't tell us what happens tomorrow or next week - just why stocks have been up in recent weeks.
I am not a fundamental analyst by any means so it's not the data that gets my attention as much as what the charts are doing, and there's no doubt the charts are going up and have momentum, they are acting like they are in a bull market, and they are making new highs. It's really all that matters, I suppose, to short-term traders. But market timers are also looking for reasons why the market might turn. I had seen plenty of them recently, but the upside momentum has been too strong to stop the train.
So when you see a headline like this one from CNBC yesterday, "CPI report shows inflation easing in April, with consumer prices still rising 3.4% from a year ago", what do you hear?
Inflation has been an issue for a couple of years now and as the headline says, prices are "still rising." Prices are not coming down, but compared to the extreme increases over the last year or two, they are not going up as quickly. The CPI was up 3.4% year over year, and the Core CPI, which does not include food and energy costs, was up 3.6% over last year's prices. The last time that happened, before the last couple of years, was more than 30 years ago. Today a 3.4% / 3.6% increase in prices triggered a big rally in the stock market. One red flag is that shelter (housing and rentals) was up 5.5% year over year, and that could weigh on the Fed's interest rate decision.
Of course for the stock market it is all relative to expectations, and that's why stocks went up because these numbers were a tick below expectations, so the market is attempting to price in this new number.
The CPI data most likely takes any thought of another interest rate hike off the table, but the big question is, will this figure be enough for the Fed to cut interest rates off the current levels? They are currently where they are, and near historic norms actually, because the Fed was trying to bring inflation down to their target of 2%. If they cut rates will that get them closer or further from 2% inflation? And if rates come down do you think that will move shelter prices up or down?
Cutting rates would more likely stimulate the economy and increase inflation, not decrease it. The Fed's biggest fear would be cutting rates and seeing inflation flare up again like in the 1970's and 80's. But cutting rates is not all the Fed can do. As I have talked about for months now, the Fed has been aggressively reducing their balance sheet and that does help inflation as much as a rate hike would, so that's good news for the economy, but maybe not for the stock market -- eventually, once the freight train loses momentum.
Stocks have been rising for one of the best reasons, because earnings have been coming in better than expected, but even with that the valuation investors like Warren Buffett are not seeing value in the stock market, as we talked about recently. But let's not forget that we came into this year with the expectation that the Fed could be cutting interest rates 6 or 7 times this year. Now we're debating if they will cut once. Granted, the reason that number has come down is because the lofty inflation numbers have come down, but unless the economy tanks, we may not see more than one rate cut anytime soon.
Anyway, here are the CPI and Core CPI charts for the last several decades, and while we see the trend coming down, prices are still rising faster than normal. Here's the current 3.4% rate of the CPI, and 3.6% Core CPI, compared to the last 50+ years.
Even after the dramatic decline, the CPI is rising faster than anytime since a blip in 2011, and for the Core CPI, faster than anytime since the early 1990's.
The 10-year Yield finally broke below the recent support and just yesterday I reminded everyone that flags on the bond charts haven't been working. Well, the market loves to prove me wrong and so yesterday that bear flag did break down so there goes that theory.
With the dollar falling sharply as well, the algorithms were buying as programmed. Yields down, stocks up. Dollar down, prices up. That's not always how it works, but that's what has been working for a couple of years now. Gold and silver were up big yesterday, oil was up, bitcoin was up over 7%. A weak dollar sends prices higher, and that's not good for inflation.
One warning sign may be coming from the Transportation Index. It created a negative outside reversal day on Tuesday (Turnaround Tuesday?) and yesterday it was only up 0.13%, badly lagging the broader market indices. On a positive note, the 50-day EMA held both days after breaking above it last week.
And how about the longer term chart of the S&P 500 - the weekly and monthly charts? I'll post them without commentary.
I do have some money in stocks right now, but in hindsight I have been underinvested based on the recent action, and these runaway bullish charts are very hard to trade unless you are willing to break one of the cardinal rules of "trading", which is to stay patient and not chase the market. As of yesterday that happens to be working. If I held 100% stocks right now I'd probably be looking to take a little money off the table to lock in some profits. If I held no stocks I might stay in cash or maybe buy a very small amount just to have some skin in the game and be patient with the bulk of my money.
A reminder that this is an options expiration week and volatility could easily creep in during these final two trading days, but also there is a tendency for the week following an expiration week to digest the gains or losses from expiration week. In this case that could mean some profit taking.
The S&P 500 (C-fund) continued its torrid pace after getting through the hot PPI data, and the cool CPI data. It looks like a good old fashion bull market, but even in bull market the action tends to breathe rather than go straight up. Below I illustrated how the S&P reacted after large one or more big up days. All of them this year, except the rally in mid-January, retraced most of those gains before resuming higher.
DWCPF (S-fund) gapped up and added another 1.1% yesterday. It is finally retracing that breakdown candlestick from April 1. Can it make new highs after having the run it has over the last few weeks, without some backing and filling first?
The EFA (I-fund) is certainly taking advantage of the correction in the dollar. There's a little more downside on the UUP chart before it fills the open gap from April.
BND (bonds / F-fund) broke out from its bull flag, something I said hadn't been the case in recent years on this chart as the flags had been breaking in the opposite direction from typical flag reactions. The gains yesterday were enough to fill in another overhead gap, and it broke above that red descending channel. The only open gaps now are on the downside.
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.
