Stocks hit a wall and turned down in afternoon trading yesterday, just as the bulls were seemingly cruising to another day of gains. The blind sided sell off was significant, but because of the strength of the recent rally, it barely put a dent in the monthly gains. The Dow lost 476-points, and it was actually the percentage winner as the broader indices took even larger percentage losses. Yields did not flip around. As a matter of fact the 10-year yield closed at a 5-month low, but the dollar did rebound putting pressure on most everything.
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In yesterday's commentary I talked about how rallies end and peaks are created at some point, and while we never know exactly when, the rubber band was getting stretched pretty significantly. Yesterday's decline started out of nowhere, as there wasn't any major headline, but of course it is way too early to declare this a top and the start of a pullback.
What it does do is what I have been concerned about all month. Just as the typical Santa Claus rally was about to start and investors were getting giddy with the recent returns, the market has a way of pulling the rug out from under them when they least expect it. Euphoria is not sentiment for stocks - not for long, anyway.
Again, too early to declare what yesterday's action was, but if there is more selling today, you can imagine that it could spark a lot of profit taking given the gains in recent weeks. The one thing that could put the breaks on that is the fact that paying taxes on capital gains can be delayed by a year if these gains are taken after December 31st, so it will be interesting to see if investors hold out on selling keeping the indices buoyant until the end of the year.
The yield on the 10-year Treasury Note fell to its lowest level since July yesterday. I don't think this is a legit correlation but it's interesting to point out that the yield is now back to where it was near the July peak in the S&P 500.
FedEx reported earnings on Tuesday after the bell and yesterday the stock paid the price, and that put a lot of pressure on the Dow Transportation Index, which is considered one of the market leaders and has been leading the indices higher since the October lows. There's a gap in the vicinity and this selling may be nothing more than a technical fill, but you can see that there a lot of room on the downside before this hits any major support (except perhaps for the bottom of the open gap.)
I don't want to make too much of the selling since it could turn out to be nothing, but for now it's an eye opener and may have gotten the attention of the more complacent investors. Let's just see if the bears have any follow through in them.
The futures opened higher on Wednesday evening after Micron reported strong earnings.
We will get the PCE Prices report on Friday, as well as the Personal Spending and Income reports. This is the key inflation indicator for the Fed and may not set off any alarms, but if it does happen to be hotter than expected, on a light trading day like the Friday before Christmas, it could be a market mover.
The S&P 500 (C-fund) fell sharply after making a new high in the morning. This could be a negative outside reversal day, which tends to lead to more downside, but we had one of these in the first week of December and it was a fake out. There's decent support at yesterday's lows so we'll see if the dip buyers jump right back in, or if the bears are ready to force some profit taking from the bulls. As I mentioned above, Micron did help push the futures up on Wednesday evening.
DWCPF (S-fund) lost nearly 2% yesterday and created an ugly negative outside reversal pattern on the day but the way this index has been moving, this could fill that open gap and still have a big gain for the month. Filling the gap and reversing up seems like the obvious move, but I'd expect the unexpected, which would either be a quick bounce-back that ignored the negative reversal, or a much deeper loss than the herd is expecting.
EFA (I-fund) was down 1% but with the overseas markets closed long before the decline in US stocks started yesterday, the I-fund price (not updated as of this writing) may not be that bad, but would be adjusted with today's price if the losses were not priced in.
BND (Bonds / F-fund) made another new high, making yesterday's selling something different as we have been used to bonds and stocks moving in the same direction. Sometimes lower yields aren't a good sign for stocks. Is it that time yet?
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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In yesterday's commentary I talked about how rallies end and peaks are created at some point, and while we never know exactly when, the rubber band was getting stretched pretty significantly. Yesterday's decline started out of nowhere, as there wasn't any major headline, but of course it is way too early to declare this a top and the start of a pullback.
What it does do is what I have been concerned about all month. Just as the typical Santa Claus rally was about to start and investors were getting giddy with the recent returns, the market has a way of pulling the rug out from under them when they least expect it. Euphoria is not sentiment for stocks - not for long, anyway.
Again, too early to declare what yesterday's action was, but if there is more selling today, you can imagine that it could spark a lot of profit taking given the gains in recent weeks. The one thing that could put the breaks on that is the fact that paying taxes on capital gains can be delayed by a year if these gains are taken after December 31st, so it will be interesting to see if investors hold out on selling keeping the indices buoyant until the end of the year.
The yield on the 10-year Treasury Note fell to its lowest level since July yesterday. I don't think this is a legit correlation but it's interesting to point out that the yield is now back to where it was near the July peak in the S&P 500.
FedEx reported earnings on Tuesday after the bell and yesterday the stock paid the price, and that put a lot of pressure on the Dow Transportation Index, which is considered one of the market leaders and has been leading the indices higher since the October lows. There's a gap in the vicinity and this selling may be nothing more than a technical fill, but you can see that there a lot of room on the downside before this hits any major support (except perhaps for the bottom of the open gap.)
I don't want to make too much of the selling since it could turn out to be nothing, but for now it's an eye opener and may have gotten the attention of the more complacent investors. Let's just see if the bears have any follow through in them.
The futures opened higher on Wednesday evening after Micron reported strong earnings.
We will get the PCE Prices report on Friday, as well as the Personal Spending and Income reports. This is the key inflation indicator for the Fed and may not set off any alarms, but if it does happen to be hotter than expected, on a light trading day like the Friday before Christmas, it could be a market mover.
The S&P 500 (C-fund) fell sharply after making a new high in the morning. This could be a negative outside reversal day, which tends to lead to more downside, but we had one of these in the first week of December and it was a fake out. There's decent support at yesterday's lows so we'll see if the dip buyers jump right back in, or if the bears are ready to force some profit taking from the bulls. As I mentioned above, Micron did help push the futures up on Wednesday evening.
DWCPF (S-fund) lost nearly 2% yesterday and created an ugly negative outside reversal pattern on the day but the way this index has been moving, this could fill that open gap and still have a big gain for the month. Filling the gap and reversing up seems like the obvious move, but I'd expect the unexpected, which would either be a quick bounce-back that ignored the negative reversal, or a much deeper loss than the herd is expecting.
EFA (I-fund) was down 1% but with the overseas markets closed long before the decline in US stocks started yesterday, the I-fund price (not updated as of this writing) may not be that bad, but would be adjusted with today's price if the losses were not priced in.
BND (Bonds / F-fund) made another new high, making yesterday's selling something different as we have been used to bonds and stocks moving in the same direction. Sometimes lower yields aren't a good sign for stocks. Is it that time yet?
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.
