Stocks rallied yet again on Tuesday after the better than expected CPI report, and before today's FOMC meeting and the Fed's decision on interest rates. The Dow added 146-points and the gains were even better in the broader indices as the S&P, Nasdaq, and small caps all had big days. Yields were up and the dollar was down so the F-fund was down, and the I-fund outpaced the S&P 500 (C-fund) as Japans' stock market skyrockets to a 33 year high.
[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]
As the media was busy high fiving the CPI data and the probability of a Fed rate hike today are now near 0%, I am going to take a slightly more pessimistic, or maybe realistic look at the CPI, inflation, and interest rate situation. Just keeping it real, because if you have listened to what the Fed has been saying for the last several months, they may not be thinking what investors think they are thinking.
In hindsight it seems the Fed has been doing a good job of taming inflation. Some say they have gone too far because we have not felt the effects of many of the more recent rate hikes yet. It wouldn't be unheard of for the Fed to get things wrong, after all in 2021 they were saying inflation was going to be transitory and not much of a factor. That was very wrong.
The Fed Chair Powell and many Fed governors have been adamant in pursuit of curbing inflation, and for that reason, and from what they have repeatedly said, they will be aggressive because inflation can come back quickly if they let up on their fight.
Consider this as well; the latest year over year rate of the CPI price increases was 4%. That sounds a lot better than 9% like we saw last year. But 4% is 4%, and it is still a lot higher than the 0% to 3% that we saw for many years before the COVID spending accelerated it. Just because it is trending lower doesn't mean it will keep going lower, as the following chart shows. It is 4%.
So, the Fed may pause this time, but I don't see the Fed cutting rates anytime soon because they do not want to risk inflation surprising to the upside again. Their credibility is on the line to keep this in check. The only reason they could cut rates is if the economy enters a recessionary period, and that is possible as the new 5% interest rates have still not had their full impact on the economy. If they do cut then the stocks market would have likely already fallen sharply as the weak economic data will front run any cut.
Bottom line, don't get too excited about the recent inflationary numbers. The Fed surely isn't -- yet. Oh, and what if the Fed raises today? A few other central banks around the world recently raised rates again. It's not likely, but not out of the question either. I think anything short of "we're done" could shake up the market.
Yesterday's headline on the rally in yields was because "... a key inflation report showed price increases slowing, potentially bolstering the case for the Federal Reserve to skip a rate hike this week." Normally yields follow the Fed rate, or vice versa, but I suppose lower inflation is good for economic growth and yields tend to go up when the economy is growing. That's the only thing that made sense to me.
Bonds and the F-fund were down sharply with those yields rallying, and the BND bond ETF is struggling below its moving averages..
The Dow Transportation Index had a good day, reaching up toward its recent highs, but it is back near the top of a multi-month range so we'll see if the bulls have anything left for this market leader.
At some point next week we enter one of the historically weaker periods of the year for stocks. It's generally considered to coincide with the week following quadruple witching expiration week in June, which ends this Friday.
Chart provided courtesy of www.sentimentrader.com
The PPI report comes today and I assume we will see a similar cooling down of prices, but we'll see. The Fed should announce their decision on interest rates at about 2 PM ET today.
The S&P 500 (C-fund) made another new 52-week high as it recently broke above last Augusts' highs and hit levels not seen since April of 2022. It is approaching some overhead resistance but that resistance is in the form of a sharply ascending trading channel where resistance is rising quickly. Other than being extended and at the top of that channel, the only other negative I see is the continued negative divergence in the PMO indicator which has still not made a higher high and is trending down while the S&P has been trending upward. We saw that at the end of 2021.
The DWCPF (S-fund) gained more than 1% to lead the way again yesterday. It hit the highs from early March and we could get a possible double dip here, but it's not exactly a double top yet because the top was really a few weeks earlier in February near 1840 so it may not be worth noting. Yesterday's rally opened a gap below, so that's two that remain open on this chart. Too far too fast may be used here, but the small caps do like the idea of a pause in interest rates, or even a cut. Will they be disappointed by the Fed today?
EFA (I-fund) also gapped up as the dollar fell after the CPI data was released. It is testing its recent highs as well, after the sharp pullback last month. All of the overhead gaps are now filled (blue) but there are plenty below (red) and I didn't even get them all marked.
Since Japanese stocks make up the largest percentage of stocks in the I-fund, it is probably worth mentioning that it is now hitting levels not seen since 1990 -- yes over 33 years ago!
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]
As the media was busy high fiving the CPI data and the probability of a Fed rate hike today are now near 0%, I am going to take a slightly more pessimistic, or maybe realistic look at the CPI, inflation, and interest rate situation. Just keeping it real, because if you have listened to what the Fed has been saying for the last several months, they may not be thinking what investors think they are thinking.
In hindsight it seems the Fed has been doing a good job of taming inflation. Some say they have gone too far because we have not felt the effects of many of the more recent rate hikes yet. It wouldn't be unheard of for the Fed to get things wrong, after all in 2021 they were saying inflation was going to be transitory and not much of a factor. That was very wrong.
The Fed Chair Powell and many Fed governors have been adamant in pursuit of curbing inflation, and for that reason, and from what they have repeatedly said, they will be aggressive because inflation can come back quickly if they let up on their fight.
Consider this as well; the latest year over year rate of the CPI price increases was 4%. That sounds a lot better than 9% like we saw last year. But 4% is 4%, and it is still a lot higher than the 0% to 3% that we saw for many years before the COVID spending accelerated it. Just because it is trending lower doesn't mean it will keep going lower, as the following chart shows. It is 4%.
So, the Fed may pause this time, but I don't see the Fed cutting rates anytime soon because they do not want to risk inflation surprising to the upside again. Their credibility is on the line to keep this in check. The only reason they could cut rates is if the economy enters a recessionary period, and that is possible as the new 5% interest rates have still not had their full impact on the economy. If they do cut then the stocks market would have likely already fallen sharply as the weak economic data will front run any cut.
Bottom line, don't get too excited about the recent inflationary numbers. The Fed surely isn't -- yet. Oh, and what if the Fed raises today? A few other central banks around the world recently raised rates again. It's not likely, but not out of the question either. I think anything short of "we're done" could shake up the market.
Yesterday's headline on the rally in yields was because "... a key inflation report showed price increases slowing, potentially bolstering the case for the Federal Reserve to skip a rate hike this week." Normally yields follow the Fed rate, or vice versa, but I suppose lower inflation is good for economic growth and yields tend to go up when the economy is growing. That's the only thing that made sense to me.
Bonds and the F-fund were down sharply with those yields rallying, and the BND bond ETF is struggling below its moving averages..
The Dow Transportation Index had a good day, reaching up toward its recent highs, but it is back near the top of a multi-month range so we'll see if the bulls have anything left for this market leader.
At some point next week we enter one of the historically weaker periods of the year for stocks. It's generally considered to coincide with the week following quadruple witching expiration week in June, which ends this Friday.
Chart provided courtesy of www.sentimentrader.com
The PPI report comes today and I assume we will see a similar cooling down of prices, but we'll see. The Fed should announce their decision on interest rates at about 2 PM ET today.
The S&P 500 (C-fund) made another new 52-week high as it recently broke above last Augusts' highs and hit levels not seen since April of 2022. It is approaching some overhead resistance but that resistance is in the form of a sharply ascending trading channel where resistance is rising quickly. Other than being extended and at the top of that channel, the only other negative I see is the continued negative divergence in the PMO indicator which has still not made a higher high and is trending down while the S&P has been trending upward. We saw that at the end of 2021.
The DWCPF (S-fund) gained more than 1% to lead the way again yesterday. It hit the highs from early March and we could get a possible double dip here, but it's not exactly a double top yet because the top was really a few weeks earlier in February near 1840 so it may not be worth noting. Yesterday's rally opened a gap below, so that's two that remain open on this chart. Too far too fast may be used here, but the small caps do like the idea of a pause in interest rates, or even a cut. Will they be disappointed by the Fed today?
EFA (I-fund) also gapped up as the dollar fell after the CPI data was released. It is testing its recent highs as well, after the sharp pullback last month. All of the overhead gaps are now filled (blue) but there are plenty below (red) and I didn't even get them all marked.
Since Japanese stocks make up the largest percentage of stocks in the I-fund, it is probably worth mentioning that it is now hitting levels not seen since 1990 -- yes over 33 years ago!
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.
