After four straight negative Tuesdays, the fifth Tuesday in August was a big one for stocks with most indices popping between 1% and 2%. It is a pre-holiday week and that makes me a little suspicious, but the gains were real and the question is if, or how long, they can last? The charts improved greatly and the view on inflation seems to have shifted as yields fell sharply and the dollar created a negative reversal day. So, pre-holiday reversal - or the real deal?
[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]
We got weaker than expected jobs data (JOLTS job openings) and consumer sentiment and that helped push yields down. That's good but there may be something else at work this week as well.
Without getting too into the weeds, we often talk about the tendency to see pre-holiday reversals, where the action before a major holiday weekend tends to move against the larger trend. Then, after the holiday weekend, the larger trend resumes.
There's no evidence that this will happen this time, but we do have a history of the holiday reversal tendencies, which would make this rally a little suspicious except for a couple of things:
One, this rally didn't start this week, but rather 8 trading days ago when we got a positive reversal off the August 18th lows.
Two, it's only day two of this week and sometimes the pre-holiday reversal doesn't start until about now - which would be a negative reversal of this potential new uptrend - if that makes sense. In other words perhaps stocks move lower over the next three days and pop back after the holiday?
I have no idea how it will play out but I will use this info to try to make sense of whatever unfolds, and I probably won't be too surprised no matter what happens since there are multiple possibilities, whether it is driven by fundamentals, or it is psychological with the holiday tendency.
The market is not always on a "fade the yields" mission but right now that seems to be what is driving the indices and it may just be how the short-term algorithms are programmed at the moment. Sometimes its the price of oil, the action in Japan or Europe, jobs data, etc., but the catalysts change with the headline of the moment, and right now inflation and interest rates are the driving force, so fading the movement of yields is the game to play.
Yesterday the Yield on the 10-year Treasury, which was over 4.35% a week ago, fell back to 4.12%. It doesn't sound like much of a move but it's the direction of the move that gets investor's attention.
The 2-year yield, which the Fed follows closely, has fallen from over 5.0% to 4.92% yesterday. Again, not a huge move but under 5% is a psychological level and a possible sign that yields have peaked - meaning inflation is less of an issue.
After yesterday's weaker than expected July JOLTS report (job openings data), the probability of a 0.25% Fed rate hike at their November FOMC meeting fell from a 51% chance on Monday, to a 42% chance yesterday. The odds of no change at that meeting went from 38% to 53%.
The dollar also changed course yesterday reiterating the possibility that the economy may be cooling and inflation may be easing. A pullback had been long overdue, but again - is this just a temporary pre-holiday reversal from the major trend?
I continue to mention the PCE Prices and Personal Spending reports which come out on Thursday and that could make or break this relief rally as the Fed cares more about this data than the JOLTS that we just got. Then of course we get the August Jobs Report Friday, another market mover before a major holiday. Estimates are looking for a gain of 165,000 jobs and an unemployment rate of 3.6%.
The S&P 500 (C-fund) blasted through resistance yesterday and closed above the key 50-day EA for a second straight day. Being a worry wart, I am concerned that this could be pre-holiday shenanigans that could reverse back next week (or in the coming days), but there's no doubt that the move was impressive without too much of a catalyst. The problem is we have some major catalysts coming up with that PCE prices report tomorrow, and the jobs report on Friday. Filling the gap above 4550 would be the next job for the bulls, but that's assuming it can climb over the immediate resistance near 4500.
DWCPF (S-fund) also cut through key resistance levels in the 50-day EMA and the top of the bear flag. That's not typical action during a pullback but again, is this just pre-holiday trading that gets investors leaning the wrong way? The fact that the 200-day EMA held is a big plus and could be a reason that this rally is for real. That's a great place for a pullback to find support.
The EFA (I-fund) -- ditto. And like the S&P 500 and the DWCPF, it is at some resistance right now, and it looks fairly stubborn. A move higher today despite the resistance, will be a bullish tell.
BND (Bonds / F-fund) also rallied strongly, confirming Monday's modest breakout, but it now finds itself at the 50-day EMA. Aren't the charts interesting? Even if all of these lines and indicators are self-fulfilling, they still have an impact and we have to respect them. In the past we saw some temporary moves above the 50-day EMA but the area was "sticky" as we saw throughout June and some in July.
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.
Like what you're seeing on TSP Talk? Why not Tell a Friend about us? We'd really appreciate it, and they may too.
Thanks!
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]
We got weaker than expected jobs data (JOLTS job openings) and consumer sentiment and that helped push yields down. That's good but there may be something else at work this week as well.
Without getting too into the weeds, we often talk about the tendency to see pre-holiday reversals, where the action before a major holiday weekend tends to move against the larger trend. Then, after the holiday weekend, the larger trend resumes.
There's no evidence that this will happen this time, but we do have a history of the holiday reversal tendencies, which would make this rally a little suspicious except for a couple of things:
One, this rally didn't start this week, but rather 8 trading days ago when we got a positive reversal off the August 18th lows.
Two, it's only day two of this week and sometimes the pre-holiday reversal doesn't start until about now - which would be a negative reversal of this potential new uptrend - if that makes sense. In other words perhaps stocks move lower over the next three days and pop back after the holiday?
I have no idea how it will play out but I will use this info to try to make sense of whatever unfolds, and I probably won't be too surprised no matter what happens since there are multiple possibilities, whether it is driven by fundamentals, or it is psychological with the holiday tendency.
The market is not always on a "fade the yields" mission but right now that seems to be what is driving the indices and it may just be how the short-term algorithms are programmed at the moment. Sometimes its the price of oil, the action in Japan or Europe, jobs data, etc., but the catalysts change with the headline of the moment, and right now inflation and interest rates are the driving force, so fading the movement of yields is the game to play.
Yesterday the Yield on the 10-year Treasury, which was over 4.35% a week ago, fell back to 4.12%. It doesn't sound like much of a move but it's the direction of the move that gets investor's attention.
The 2-year yield, which the Fed follows closely, has fallen from over 5.0% to 4.92% yesterday. Again, not a huge move but under 5% is a psychological level and a possible sign that yields have peaked - meaning inflation is less of an issue.
After yesterday's weaker than expected July JOLTS report (job openings data), the probability of a 0.25% Fed rate hike at their November FOMC meeting fell from a 51% chance on Monday, to a 42% chance yesterday. The odds of no change at that meeting went from 38% to 53%.
The dollar also changed course yesterday reiterating the possibility that the economy may be cooling and inflation may be easing. A pullback had been long overdue, but again - is this just a temporary pre-holiday reversal from the major trend?
I continue to mention the PCE Prices and Personal Spending reports which come out on Thursday and that could make or break this relief rally as the Fed cares more about this data than the JOLTS that we just got. Then of course we get the August Jobs Report Friday, another market mover before a major holiday. Estimates are looking for a gain of 165,000 jobs and an unemployment rate of 3.6%.
The S&P 500 (C-fund) blasted through resistance yesterday and closed above the key 50-day EA for a second straight day. Being a worry wart, I am concerned that this could be pre-holiday shenanigans that could reverse back next week (or in the coming days), but there's no doubt that the move was impressive without too much of a catalyst. The problem is we have some major catalysts coming up with that PCE prices report tomorrow, and the jobs report on Friday. Filling the gap above 4550 would be the next job for the bulls, but that's assuming it can climb over the immediate resistance near 4500.
DWCPF (S-fund) also cut through key resistance levels in the 50-day EMA and the top of the bear flag. That's not typical action during a pullback but again, is this just pre-holiday trading that gets investors leaning the wrong way? The fact that the 200-day EMA held is a big plus and could be a reason that this rally is for real. That's a great place for a pullback to find support.
The EFA (I-fund) -- ditto. And like the S&P 500 and the DWCPF, it is at some resistance right now, and it looks fairly stubborn. A move higher today despite the resistance, will be a bullish tell.
BND (Bonds / F-fund) also rallied strongly, confirming Monday's modest breakout, but it now finds itself at the 50-day EMA. Aren't the charts interesting? Even if all of these lines and indicators are self-fulfilling, they still have an impact and we have to respect them. In the past we saw some temporary moves above the 50-day EMA but the area was "sticky" as we saw throughout June and some in July.
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.
Like what you're seeing on TSP Talk? Why not Tell a Friend about us? We'd really appreciate it, and they may too.
Thanks!
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.
