The market shrugged off some early selling on Friday to rally into the close again and cap off another good week for the stock market, which has gotten off to a great start in 2023. The S and I funds continue to outpace the large caps of the C-fund, and bonds took a day off from their recent rally with a moderate pullback. For the month all of the TSP funds are doing just fine as we head into earnings season. However, the big carrot on the stick that investors are watching is the next FOMC meeting which is just a couple of weeks away.
[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]
The US dollar peaked in late September of last year, and the 10-year Treasury yield peaked shortly after in October. That combination also coincided with the lows in the S&P 500 Index and since then the bulls have enjoyed a successful rally, despite some unseasonably poor action in the normally strong month of December. Then, as if someone flipped a switch, the stocks market has turned up sharply in January.
On Friday we saw a modest bounce in yields and stocks stumbled out of that at the opening bell, and the dollar was up early adding to that pressure, but it came back down to close near the lows of the day and down slightly helping stocks close strongly.
So the question is, can yields and the dollar continue to decline, and do so in the wake of the Fed who continues to raise interest rates? If you look at the correlation between the 2-year Treasury Yield and the Fed Funds Rate below, it seems one is following the other, and I'd say it is the red 2-yr yield that is leading the Fed (black line.) The yield on the 2-year got up over 4.70% last year and now it is 4.17%, so it is clearly falling, so with the Fed Finds rate at 4.5% right now, do you think it is possible that the Fed may consider not raising rates in their February meeting? How do you think the stock market would react to that?
The trouble for the stock market right now, besides the potential for some level of recession this year, is that the charts are up against some serious resistance, and being self-fulfilling prophesies at times, we could see some selling from traders / investors who can see the wall that the weekly S&P 500 chart faces right now. A move up to 4100 on the S&P 500 could get more people interested and a move above 4100 would certainly get the attention of most money managers. There is a gap just above 4200, which can be a lure, but that could turn into a trap. That is, a breakout that fills the gap but acts as resistance after trapping the people who bought the breakout. Maybe.
The week following Martin Luther King Jr. Day weekend doesn't have the best record in the world, which may be because the start of January has a strong record and investors want to lock in the "normal" seasonal gains that we see in December and the start of January before earnings season kicks in. Although we didn't get the December rally, this could be in store for the market this week as the recent rally has created a short-term overbought condition on some indicators.
Chart provided courtesy of [url]www.sentimentrader.com
[/URL]
That chart data is outdated, but here's more information from of forum member JTH who has made some recent updates to this data, through last year, in the forum: Click here to view. It basically shows the same pattern so - spoiler alert, the data is not much better.
The difference this year could be that there are so many investors who have negative / bearish sentiment because of the bear market action last year, rising interest rates, the potential for recession this year, higher, although easing prices, etc., and that kind of negative sentiment can keep pullbacks shallow during a relief rally because the underinvested are looking for spots to try to do some buying.
The rally could keep going, it could be a trap, it could be a lot of things. Right now, be mindful of the resistance levels and how the market reacts around them. Watch trading volume. We have had a lot of positive internal numbers from volume breadth to the number of new highs vs. new lows, and even some very good action in the High Yield market, and all of that suggest good things, but if the chart can't get above resistance, all of that could mean nothing and the selling would start again.
Admin note: Thanks so much to all of you who took advantage of last week's annual subscription sale! We appreciate you, and all of our subscribers and readers!
The S&P 500 (C-fund) closed above the 200-day EMA (navy) and simple average (orange) on Friday, something it attempted, and failed to hold, back in December before that pullback ensued. We talked about some short term resistance levels above in that weekly chart, but this chart shows that small gap that is still open near 3925 that may need to get addressed if there's a short-term pullback during this seasonally weaker than average week for stocks. There's definitely some improvements here but technically we're still in a bear market so don't let your guard down and stay nimble.
The DWCPF (S-fund) had been struggling and lagging all of 2022, but it has started out on top in 2023 with a gain of near 7% in just two weeks. There's one of those roadblocks in the way however, in the form of the 200-day EMA, and you can see what happened back in August and perhaps less dramatically, again in November and December. Do or die, but also be cognizant of a possible fake out - breakout.
The EFA / I-fund is also up nearly 7% for the month and it has been leaping above resistance. There's more resistance just overhead and we know stocks don't go straight up, but because of the relentless weakness in the dollar over the last several months, this one could withstand a pullback better than the C and S funds might. Of course a headline that spikes the dollar back up could magnify a pullback here, so I'm talking about the trend.
BND (bonds / F-fund) has also been on the run and the lower yields have been one of the catalysts for the stock market rally. The reason I am interested in the F-fund this year is because it could go up if stocks are rallying or falling, based on the economic conditions. A recession would likely help bonds. One thing that could hurt is if the Fed insists on continuing to raise interest rates. But as I mentioned above, the Fed tends to follow the 2-year Treasury yield, and it has been falling quite a bit lately.
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.
[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]
The US dollar peaked in late September of last year, and the 10-year Treasury yield peaked shortly after in October. That combination also coincided with the lows in the S&P 500 Index and since then the bulls have enjoyed a successful rally, despite some unseasonably poor action in the normally strong month of December. Then, as if someone flipped a switch, the stocks market has turned up sharply in January.
On Friday we saw a modest bounce in yields and stocks stumbled out of that at the opening bell, and the dollar was up early adding to that pressure, but it came back down to close near the lows of the day and down slightly helping stocks close strongly.
So the question is, can yields and the dollar continue to decline, and do so in the wake of the Fed who continues to raise interest rates? If you look at the correlation between the 2-year Treasury Yield and the Fed Funds Rate below, it seems one is following the other, and I'd say it is the red 2-yr yield that is leading the Fed (black line.) The yield on the 2-year got up over 4.70% last year and now it is 4.17%, so it is clearly falling, so with the Fed Finds rate at 4.5% right now, do you think it is possible that the Fed may consider not raising rates in their February meeting? How do you think the stock market would react to that?
The trouble for the stock market right now, besides the potential for some level of recession this year, is that the charts are up against some serious resistance, and being self-fulfilling prophesies at times, we could see some selling from traders / investors who can see the wall that the weekly S&P 500 chart faces right now. A move up to 4100 on the S&P 500 could get more people interested and a move above 4100 would certainly get the attention of most money managers. There is a gap just above 4200, which can be a lure, but that could turn into a trap. That is, a breakout that fills the gap but acts as resistance after trapping the people who bought the breakout. Maybe.
The week following Martin Luther King Jr. Day weekend doesn't have the best record in the world, which may be because the start of January has a strong record and investors want to lock in the "normal" seasonal gains that we see in December and the start of January before earnings season kicks in. Although we didn't get the December rally, this could be in store for the market this week as the recent rally has created a short-term overbought condition on some indicators.
Chart provided courtesy of [url]www.sentimentrader.com
[/URL]
That chart data is outdated, but here's more information from of forum member JTH who has made some recent updates to this data, through last year, in the forum: Click here to view. It basically shows the same pattern so - spoiler alert, the data is not much better.
The difference this year could be that there are so many investors who have negative / bearish sentiment because of the bear market action last year, rising interest rates, the potential for recession this year, higher, although easing prices, etc., and that kind of negative sentiment can keep pullbacks shallow during a relief rally because the underinvested are looking for spots to try to do some buying.
The rally could keep going, it could be a trap, it could be a lot of things. Right now, be mindful of the resistance levels and how the market reacts around them. Watch trading volume. We have had a lot of positive internal numbers from volume breadth to the number of new highs vs. new lows, and even some very good action in the High Yield market, and all of that suggest good things, but if the chart can't get above resistance, all of that could mean nothing and the selling would start again.
Admin note: Thanks so much to all of you who took advantage of last week's annual subscription sale! We appreciate you, and all of our subscribers and readers!
The S&P 500 (C-fund) closed above the 200-day EMA (navy) and simple average (orange) on Friday, something it attempted, and failed to hold, back in December before that pullback ensued. We talked about some short term resistance levels above in that weekly chart, but this chart shows that small gap that is still open near 3925 that may need to get addressed if there's a short-term pullback during this seasonally weaker than average week for stocks. There's definitely some improvements here but technically we're still in a bear market so don't let your guard down and stay nimble.
The DWCPF (S-fund) had been struggling and lagging all of 2022, but it has started out on top in 2023 with a gain of near 7% in just two weeks. There's one of those roadblocks in the way however, in the form of the 200-day EMA, and you can see what happened back in August and perhaps less dramatically, again in November and December. Do or die, but also be cognizant of a possible fake out - breakout.
The EFA / I-fund is also up nearly 7% for the month and it has been leaping above resistance. There's more resistance just overhead and we know stocks don't go straight up, but because of the relentless weakness in the dollar over the last several months, this one could withstand a pullback better than the C and S funds might. Of course a headline that spikes the dollar back up could magnify a pullback here, so I'm talking about the trend.
BND (bonds / F-fund) has also been on the run and the lower yields have been one of the catalysts for the stock market rally. The reason I am interested in the F-fund this year is because it could go up if stocks are rallying or falling, based on the economic conditions. A recession would likely help bonds. One thing that could hurt is if the Fed insists on continuing to raise interest rates. But as I mentioned above, the Fed tends to follow the 2-year Treasury yield, and it has been falling quite a bit lately.
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.
