The rally on Monday was quite impressive. Not so much in the size of the gains, but from where the indices started at the opening bell, and even more so, where the futures were overnight. The Dow was down 760 points near the opening bell, but the futures were actually down another 400 on top of that in overnight trading, so to close up 158-points was quite an impressive move. The question is, was the move too much for one day?
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Small caps led on the upside, and because of the late rally in the U.S. indices, the I-fund lagged a bit.
Where the indices found support was the story, as we talked about yesterday. We saw several charts fighting to hold onto support lines and key moving averages, and it turned out that investors were ready to buy at those levels. From the June 8th high to yesterday's low we actually had a near 10% correction and perhaps the support at the 50 and 200-day EMAs was the thing keeping the 8.3% pullback from becoming a full 10% correction.
So, is that it? Are we out of the woods for further pullback? Possibly not. I wish I could say this is a long-term green light signal but we have some reminders from the recent and distant past that will have us questioning every move at this point. Yes, it's a different market than it was in March but big reversal days in March were one day wonders and the downside resumed shortly after them.
At some point, perhaps at a double top or when the open gap gets filled near 3200, we could see another wave of selling. Those would be decent gains but this push higher may be just enough to get those Robinhood traders back in with unrestrained confidence - possible a recipe for a bait and switch from the market.
But even with all of the negative possibilities, the mantra of "Don't Fight the Fed" keeps ringing in investors' ears. Stocks jumped yesterday just as word got out that the Fed was going to start buying Corporate Bonds. They had been buying the ETFs but now they are buying the bonds, despite the fact that it's probably illegal for them to do so.
According to hussmanfunds.com: https://www.hussmanfunds.com/comment/mc200608/
"The moment the Fed purchases corporate bonds beyond the amount of CARES funds directly provided by the Treasury, without taking collateral, it violates explicit “requirements relating to loan collateralization, taxpayer protection, and borrower solvency” that the CARES Act emphasized like a children’s book – using the phrase “For the avoidance of doubt.” The moment any of the Fed’s purchases generate a loss beyond CARES funds directly provided by the Treasury, it will have extended this violation to include Article 1 Section 8 of the U.S. Constitution.
"It’s important to understand why it would be so illegal and insidious for the Fed to “leverage” CARES funds to buy corporate bonds. See, when the Fed (legally) buys Treasury bonds and other obligations that are guaranteed as to principal and interest by the U.S. government, it withdraws those government obligations from the hands of investors, and replaces them with other government obligations that we call “base money” (currency and reserves). This is not fiscal policy (government spending) because total publicly held government liabilities don’t change. Monetary policy just changes the mix of government obligations held by the public." More
The momentum is back on the upside and we should know soon enough if this was one of those March-type one day wonders, or if it's the start of another leg higher to either close the overhead open gaps, or test the old highs. The futures opened on the upside on Monday evening.
The S&P 500 (C-fund) opened sharply lower but saw immediate buying and we had a positive reversal day right at some key support. The overnight futures were down sharply indicating a possible gap down below the 50 and 200-day EMAs, and that might have changed everything. There's an open gap overhead that needs filling and then another one (not shown) from back in February, but let's take it one day at a time.
I'm throwing this chart in to play devil's advocate because it wouldn't be the first time that a rally up to new highs meant the worst is over, and there's no better example than the new highs made in late 2007, which turned out to be a peak that lasted for years. Whenever I hear people say I should just buy and hold because we always run to new highs eventually, I think of this chart. If you didn't mind waiting for 4 years, you were right in this case. It also took more than 7 years to get back to the 2000 peak levels after that bear market.
The DWCPF (S-fund) rallied 2% yesterday after being down nearly 3% at the open. That's a rare day, indeed. The reversal here was an outside reversal day because the day's highs and lows exceeded Friday's highs and lows.
The Dow Transportation Index was down quite sharply at the open yesterday, but the 50-day EMA did what the bulls wanted it to do, which is to hold and keep the pullback from going any further.
The High Yield Corporate Bond Fund had a big day and of course the Fed buying corporate bonds had a lot to do with it. But I was a little concerned that the rally failed to close back over that April high again, and also it filled the gap and backed off some.
The BND (F-fund) was up fairly big gain for a bond move, but yield were rising late so I'm not sure if the F-fund is going to be given a gain or not. The price hasn't been posted yet.
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
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.
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[TD="align: center"]
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Small caps led on the upside, and because of the late rally in the U.S. indices, the I-fund lagged a bit.
Where the indices found support was the story, as we talked about yesterday. We saw several charts fighting to hold onto support lines and key moving averages, and it turned out that investors were ready to buy at those levels. From the June 8th high to yesterday's low we actually had a near 10% correction and perhaps the support at the 50 and 200-day EMAs was the thing keeping the 8.3% pullback from becoming a full 10% correction.
So, is that it? Are we out of the woods for further pullback? Possibly not. I wish I could say this is a long-term green light signal but we have some reminders from the recent and distant past that will have us questioning every move at this point. Yes, it's a different market than it was in March but big reversal days in March were one day wonders and the downside resumed shortly after them.
At some point, perhaps at a double top or when the open gap gets filled near 3200, we could see another wave of selling. Those would be decent gains but this push higher may be just enough to get those Robinhood traders back in with unrestrained confidence - possible a recipe for a bait and switch from the market.
But even with all of the negative possibilities, the mantra of "Don't Fight the Fed" keeps ringing in investors' ears. Stocks jumped yesterday just as word got out that the Fed was going to start buying Corporate Bonds. They had been buying the ETFs but now they are buying the bonds, despite the fact that it's probably illegal for them to do so.
According to hussmanfunds.com: https://www.hussmanfunds.com/comment/mc200608/
"The moment the Fed purchases corporate bonds beyond the amount of CARES funds directly provided by the Treasury, without taking collateral, it violates explicit “requirements relating to loan collateralization, taxpayer protection, and borrower solvency” that the CARES Act emphasized like a children’s book – using the phrase “For the avoidance of doubt.” The moment any of the Fed’s purchases generate a loss beyond CARES funds directly provided by the Treasury, it will have extended this violation to include Article 1 Section 8 of the U.S. Constitution.
"It’s important to understand why it would be so illegal and insidious for the Fed to “leverage” CARES funds to buy corporate bonds. See, when the Fed (legally) buys Treasury bonds and other obligations that are guaranteed as to principal and interest by the U.S. government, it withdraws those government obligations from the hands of investors, and replaces them with other government obligations that we call “base money” (currency and reserves). This is not fiscal policy (government spending) because total publicly held government liabilities don’t change. Monetary policy just changes the mix of government obligations held by the public." More
The momentum is back on the upside and we should know soon enough if this was one of those March-type one day wonders, or if it's the start of another leg higher to either close the overhead open gaps, or test the old highs. The futures opened on the upside on Monday evening.
The S&P 500 (C-fund) opened sharply lower but saw immediate buying and we had a positive reversal day right at some key support. The overnight futures were down sharply indicating a possible gap down below the 50 and 200-day EMAs, and that might have changed everything. There's an open gap overhead that needs filling and then another one (not shown) from back in February, but let's take it one day at a time.
I'm throwing this chart in to play devil's advocate because it wouldn't be the first time that a rally up to new highs meant the worst is over, and there's no better example than the new highs made in late 2007, which turned out to be a peak that lasted for years. Whenever I hear people say I should just buy and hold because we always run to new highs eventually, I think of this chart. If you didn't mind waiting for 4 years, you were right in this case. It also took more than 7 years to get back to the 2000 peak levels after that bear market.
The DWCPF (S-fund) rallied 2% yesterday after being down nearly 3% at the open. That's a rare day, indeed. The reversal here was an outside reversal day because the day's highs and lows exceeded Friday's highs and lows.
The Dow Transportation Index was down quite sharply at the open yesterday, but the 50-day EMA did what the bulls wanted it to do, which is to hold and keep the pullback from going any further.
The High Yield Corporate Bond Fund had a big day and of course the Fed buying corporate bonds had a lot to do with it. But I was a little concerned that the rally failed to close back over that April high again, and also it filled the gap and backed off some.
The BND (F-fund) was up fairly big gain for a bond move, but yield were rising late so I'm not sure if the F-fund is going to be given a gain or not. The price hasn't been posted yet.
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
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.
