The pullback off the double top continued yesterday with the three major indices losing ground again, and the more volatile small caps and I-fund hit the hardest as yields and the dollar moved higher again. If there was a silver lining, the indices closed off the lows and near the highs of the day so there was some buying interest late, and the buying seemed to start near key moving averages that the bulls want to see hold in a bull market. Bonds were down with yields being up and how high they go could determine the extent of this pullback.
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It's tough to get too bearish with the S&P 500 less than 2% off its highs, but if things get worse and we start seeing some other key support levels get taken out, then maybe it will be time to take this decline more seriously.
The small caps and the I-fund are in a more serious decline and it almost all has to do with what is happening with yields and the dollar, but they too are flirting with key support.
The 10-year Treasury Yield was up again yesterday after someone flipped a switch causing this post holiday reversal. The 50-day EMA is being tested after the 200-day EMA was broken yesterday. Again, higher yields and interest rates tend to hurt small caps more, and of course the F-fund is impacted directly by the direction of yields.
BND (F-fund) was down 0.23% yesterday and we still have stocks and bonds moving in the same direction, rather than bonds acting as a safe haven when stocks are falling. There is a bullish looking flag forming on BND so an argument can be made that this is a temporary pullback before another push higher.
While we're talking about yields, the 2-year / 10-year Yield curve has been steepening and for a second time in a few months it is attempting to un-invert. That is, the 10-year yield is trying to finally move back above the 2-year yield. I've talked about this a few times since the inverted yield curve initially inverted in 2022 and the thought is that, while this is a good thing, it is often this unraveling of the inversion that can be rough on the stock market. Not because of the reversing of the yield curve, but rather the reason it is happening, and that reason tends to be caused by the Fed lowering short term rates because of weakening economic conditions.
Above is an example of the 2006 - 2009 market when the yield curve inverted in 2006 and stayed inverted until about mid-2007. And of course that recession and bear market played out in 2008 after the market peaked in late 2007.
The point is, an inverted yield curve is a warning when it first happens, but the end result can be months or years later when the Fed tries to fix the problem of the forewarned weakening economy.
The dollar bottomed in late 2023 and after a two week consolidation broke out to the upside this week, we have an I-fund feeling the negative effects. The dollar (UUP) did close near the lows of the day yesterday, and that created a negative reversal pattern so perhaps there will be some short-term relief if the chart wants to go back and fill in Tuesday's open gap below.
You can see that the I-fund has pulled back sharply but it is trying to hang onto the 50-day EMA as support. Perhaps if the UUP fills in that open gap below it will help the I-fund fill in one or two of its overhead open gaps, which would make for a nice relief rally if it happens.
Speaking of the I-fund, Japan's stock market is still near its 52-week highs although yesterday's action was a little suspect with that negative outside reversal day. There are a couple of open gaps below but what's interesting here is the contrast between Japan's market and Hong Kong's Hang Seng stock market which is breaking down to new lows.
The Hang Seng market is following China's path, which I suppose makes sense, and while China is not a part of our I-fund, Hong Kong is.
The S&P 500 (C-fund) struggled yesterday but it did manage to rally late and push itself back above the 20-day EMA and the blue rising support line. The double top pullback is normal action and the S&P had come a long way from the October lows to create the double top so some consolidation isn't the worst thing that could happen. The question is whether it becomes more than that because of the shift in sentiment in interest rates, which may not be coming down as much as investors had hoped. I still see 4650 as a line in the sand, but the 20-day EMA and the blue support line could end up holding and if that's the case, everyone will turn bullish again.
DWCPF (S-fund) has been getting slammed and the action has been poor on the yield / interest rate development but it too is holding up enough - as of now - to see a possible bull flag forming, rather than an outright breakdown. The retracement of that breakout candle from December is also normal action, but that level really needs to hold near 1850 and the 50-day EMA.
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 tough to get too bearish with the S&P 500 less than 2% off its highs, but if things get worse and we start seeing some other key support levels get taken out, then maybe it will be time to take this decline more seriously.
The small caps and the I-fund are in a more serious decline and it almost all has to do with what is happening with yields and the dollar, but they too are flirting with key support.
The 10-year Treasury Yield was up again yesterday after someone flipped a switch causing this post holiday reversal. The 50-day EMA is being tested after the 200-day EMA was broken yesterday. Again, higher yields and interest rates tend to hurt small caps more, and of course the F-fund is impacted directly by the direction of yields.
BND (F-fund) was down 0.23% yesterday and we still have stocks and bonds moving in the same direction, rather than bonds acting as a safe haven when stocks are falling. There is a bullish looking flag forming on BND so an argument can be made that this is a temporary pullback before another push higher.
While we're talking about yields, the 2-year / 10-year Yield curve has been steepening and for a second time in a few months it is attempting to un-invert. That is, the 10-year yield is trying to finally move back above the 2-year yield. I've talked about this a few times since the inverted yield curve initially inverted in 2022 and the thought is that, while this is a good thing, it is often this unraveling of the inversion that can be rough on the stock market. Not because of the reversing of the yield curve, but rather the reason it is happening, and that reason tends to be caused by the Fed lowering short term rates because of weakening economic conditions.
Above is an example of the 2006 - 2009 market when the yield curve inverted in 2006 and stayed inverted until about mid-2007. And of course that recession and bear market played out in 2008 after the market peaked in late 2007.
The point is, an inverted yield curve is a warning when it first happens, but the end result can be months or years later when the Fed tries to fix the problem of the forewarned weakening economy.
The dollar bottomed in late 2023 and after a two week consolidation broke out to the upside this week, we have an I-fund feeling the negative effects. The dollar (UUP) did close near the lows of the day yesterday, and that created a negative reversal pattern so perhaps there will be some short-term relief if the chart wants to go back and fill in Tuesday's open gap below.
You can see that the I-fund has pulled back sharply but it is trying to hang onto the 50-day EMA as support. Perhaps if the UUP fills in that open gap below it will help the I-fund fill in one or two of its overhead open gaps, which would make for a nice relief rally if it happens.
Speaking of the I-fund, Japan's stock market is still near its 52-week highs although yesterday's action was a little suspect with that negative outside reversal day. There are a couple of open gaps below but what's interesting here is the contrast between Japan's market and Hong Kong's Hang Seng stock market which is breaking down to new lows.
The Hang Seng market is following China's path, which I suppose makes sense, and while China is not a part of our I-fund, Hong Kong is.
The S&P 500 (C-fund) struggled yesterday but it did manage to rally late and push itself back above the 20-day EMA and the blue rising support line. The double top pullback is normal action and the S&P had come a long way from the October lows to create the double top so some consolidation isn't the worst thing that could happen. The question is whether it becomes more than that because of the shift in sentiment in interest rates, which may not be coming down as much as investors had hoped. I still see 4650 as a line in the sand, but the 20-day EMA and the blue support line could end up holding and if that's the case, everyone will turn bullish again.
DWCPF (S-fund) has been getting slammed and the action has been poor on the yield / interest rate development but it too is holding up enough - as of now - to see a possible bull flag forming, rather than an outright breakdown. The retracement of that breakout candle from December is also normal action, but that level really needs to hold near 1850 and the 50-day EMA.
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.
