Stocks opened lower on Friday after the slightly elevated inflationary Producer Prices report was released, but the bulls battled back, only to see the action get very choppy in afternoon trading, and into the close. The results were mixed with the Dow gaining 105-points, the S&P was down slightly, and the Nasdaq was down for the day, and for the week, making it the first two week losing streak this year for the tech heavy index. Bonds were down sharply as yields moved up on the PPI data.
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First off, our thoughts and prayers go out to those impacted by the fires in Maui. Just awful.
The market seems to have priced in the fact that the Fed may be done raising interest rates for a while, but the PPI report was a little more inflationary than expected and yields moved up, and the probability of another interest rate hike at the November meeting went from 20% last month, to 34% after Friday.
The Yield on the 10-year Treasury pushed back above 4% after the CPI and PPI reports were released. The 2-year yield is now flirting with 5% again. Getting somewhere near 5% in a 2-year bond give investors some options over stocks, something they didn't have a couple years ago.
The 2/10 year yield curve is still very much inverted and has been for over a year now. This historically has meant a recession is coming, but so far it has not. The chances of some kind of recession, whether a hard or soft landing, is still the consensus for sometime by the end of 2024. The fact that the yield curve is steepening instead of getting more inverted sounds good, but...
... this old chart I posted a while back shows that the stocks market actually doesn't do very well when the yield curve is steepening out of an inverted state. That's because it tends to steepen when the Fed is cutting short term rates because of economic weakness. So, there doesn't seem to be a good outcome down the road, until we've dealt with the mess of spending to the point of creating inflation. Yes, there will be good times and bad in the short-term spurts, but it may be tough to get out of this unscathed.
The dollar showed strength again last week and now UUP is back above the blue dashed descending resistance line, but a couple of possible double tops coming up could push it down again, which the stock market might prefer.
The weekly chart of the S&P 500 shows that last week's losses was the 2nd two-week losing streak of the year, but it is testing a rising channel (blue) and it would take some gains this week to keep that channel intact. A move to the 4310 area wouldn't be the worst thing to happen to this chart in the intermediate term after the 5 month rally, but that would mean another 4% or 5% on the downside should that area be tested.
The seasonality chart for August is one of the worst months of the year, but the second half does have a better record than the first half. I see 8 days of the first 13 that are down more often than up, but only 3 in the final 18 days.
It's not a really busy week for key economic reports, although tomorrow we will get the monthly retail sales numbers, which could provide a catalyst for stocks. Other than that I think next week's earnings from Nvidia could be the next market mover.
The S&P 500 (C-fund) is sitting on a confluence of support that could be a major test of the market after the recent pullback. If we eventually get a 10% correction out of this, we would be looking at a move below 4200, which would cut through most intermediate-term support, so the bulls have some work to do near those arrows if they want to prevent that from happening. It is an options expiration week so we could see some games being played as specific price areas get targeted and defended by traders, but expiration weeks also have a bullish bias historically with the week after typically showing more weakness.
DWCPF (S-fund) is also sitting on key support making this week a very pivotal point for the market.
EFA (I-fund) has been chopping around recently, thanks to another rally in the dollar. This time that chopping around has created a bearish flag and a breakdown at some point could turn into a test of the 200-day EMA, so the bulls have some work to do. Perhaps the lure of filling that open gap up near the July highs could help.
BND (Bonds / F-fund) fell sharply for a second straight day as the CPI and PPI reports pushed yields higher. It's in a longer-term downtrend but nearing the support of that large trading channel. The question here is whether inflation or economic weakness is more likely going forward. Inflation would send this lower while economic weakness will push yields down, but this chart of bond prices would move higher.
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
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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.
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First off, our thoughts and prayers go out to those impacted by the fires in Maui. Just awful.
The market seems to have priced in the fact that the Fed may be done raising interest rates for a while, but the PPI report was a little more inflationary than expected and yields moved up, and the probability of another interest rate hike at the November meeting went from 20% last month, to 34% after Friday.
The Yield on the 10-year Treasury pushed back above 4% after the CPI and PPI reports were released. The 2-year yield is now flirting with 5% again. Getting somewhere near 5% in a 2-year bond give investors some options over stocks, something they didn't have a couple years ago.
The 2/10 year yield curve is still very much inverted and has been for over a year now. This historically has meant a recession is coming, but so far it has not. The chances of some kind of recession, whether a hard or soft landing, is still the consensus for sometime by the end of 2024. The fact that the yield curve is steepening instead of getting more inverted sounds good, but...
... this old chart I posted a while back shows that the stocks market actually doesn't do very well when the yield curve is steepening out of an inverted state. That's because it tends to steepen when the Fed is cutting short term rates because of economic weakness. So, there doesn't seem to be a good outcome down the road, until we've dealt with the mess of spending to the point of creating inflation. Yes, there will be good times and bad in the short-term spurts, but it may be tough to get out of this unscathed.
The dollar showed strength again last week and now UUP is back above the blue dashed descending resistance line, but a couple of possible double tops coming up could push it down again, which the stock market might prefer.
The weekly chart of the S&P 500 shows that last week's losses was the 2nd two-week losing streak of the year, but it is testing a rising channel (blue) and it would take some gains this week to keep that channel intact. A move to the 4310 area wouldn't be the worst thing to happen to this chart in the intermediate term after the 5 month rally, but that would mean another 4% or 5% on the downside should that area be tested.
The seasonality chart for August is one of the worst months of the year, but the second half does have a better record than the first half. I see 8 days of the first 13 that are down more often than up, but only 3 in the final 18 days.
It's not a really busy week for key economic reports, although tomorrow we will get the monthly retail sales numbers, which could provide a catalyst for stocks. Other than that I think next week's earnings from Nvidia could be the next market mover.
The S&P 500 (C-fund) is sitting on a confluence of support that could be a major test of the market after the recent pullback. If we eventually get a 10% correction out of this, we would be looking at a move below 4200, which would cut through most intermediate-term support, so the bulls have some work to do near those arrows if they want to prevent that from happening. It is an options expiration week so we could see some games being played as specific price areas get targeted and defended by traders, but expiration weeks also have a bullish bias historically with the week after typically showing more weakness.
DWCPF (S-fund) is also sitting on key support making this week a very pivotal point for the market.
EFA (I-fund) has been chopping around recently, thanks to another rally in the dollar. This time that chopping around has created a bearish flag and a breakdown at some point could turn into a test of the 200-day EMA, so the bulls have some work to do. Perhaps the lure of filling that open gap up near the July highs could help.
BND (Bonds / F-fund) fell sharply for a second straight day as the CPI and PPI reports pushed yields higher. It's in a longer-term downtrend but nearing the support of that large trading channel. The question here is whether inflation or economic weakness is more likely going forward. Inflation would send this lower while economic weakness will push yields down, but this chart of bond prices would move higher.
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.
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.
