More panic selling in bonds keeps the pressure on stocks and unlike recent days, the selling was very broad with almost no pockets of strength anywhere. The Dow lost 431-points and that actually pushed the Dow into negative territory for the year. How long the selling can continue or when we see some capitulation is anyone's guess. According to an old British financier Nathan Rothschild, "the time to buy is when there's blood in the streets." I don't know if we're there yet, but it sure is gloomy out there.
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Bonds are selling off, but why do bond prices go down? They go down as yields go up and the world is focused on the 10-year yield. Bonds are being sold, and the bond market is actually a lot bigger than our stock market, believe it or not. Much of the selling has come from China this year and they own a lot of our bonds.
When bonds are being sold, it decreases asset liquidity meaning there is less money for investing. We have also seen the Fed reducing their balance sheet dramatically this year. Both of these strengthens the dollar and helps reduce inflation, and we have seen evidence of that. Just as prices go up when the dollar is weakening, prices get negatively impacted as the dollar gets stronger. So, the market is adjusting to all of this now.
As I mentioned yesterday Art Cashen talked about the 4.7% level on the 10-year Treasury Yield being a warning sign for stocks and it flew past that yesterday closing at 4.80%. He also said that, "October is the month for bottoms", so we'll see if he can hit the exacta.
This mess all started years ago with 0% interest rates and eventually the excess spending during the COVID recovery, and I'm not saying whether or not that spending was necessary or not -- I'll leave that for you to decide -- but it did put massive liquidity and cash into the system, which eventually led to sky rocketing inflation, which led to higher interest rates, and many predict that will eventually be an anchor on the economy and send us into a recession. It's the economic circle of life.
Now the question is, when will the selling in stocks be done? It is starting to feel exhausted now, but someone still has to step up and do some buying. It could take some kind of catalyst to change the direction whether it be an intervention from the Fed, the upcoming earnings season, a break in the selling of bonds, who knows? Today? Next week? Next month?
The action leading up to yesterday's sell off was odd in that small caps, for instance, did well on Thursday and Friday of last week when other parts of the market were struggling, but they relented on Monday. And on Monday the Nasdaq was up big yet yesterday they sold off hard and lagged the S&P 500, so it's odd but perhaps when everything is going down, we are getting closer to a capitulation where everyone gives up and the market finally runs out of sellers.
That actually happened in the Utilities yesterday - one of the few areas of the market that was up yesterday. This is what capitulation looks like after Utilities had been getting destroyed in recent months. It was down sharply early, rallied back and closed near the highs with a big gain. Not shown is that is also came on very high trading volume.
So what do you do if you're in stocks, or out? If in, sometimes just selling will help clear your head to help you make a better decision. Of course the risk to that is that stocks could take off again right after you sell, and if you happen to be out of transfers for the month, you're screwed. If you're out of stocks you're wondering when it is time to get back in, and the risk of waiting is that you could miss some of the big days that come off market bottoms. If capital preservation is your main goal then the more defensive approach would make more sense. If growth is your goal, then getting more aggressive after a near 10% correction in the S&P could give you a good risk / reward. There's no one right way to play it.
We'll look at some charts but sometimes technical analysis takes a back seat to emotional trading and charts can overshoot. That can happen in bull and bear markets, but that's what makes picking tops and bottoms so tough.
The S&P 500 (C-fund) fell through the 200-day EMA yesterday after several successful tests had held. There was an open gap from early June that could have been the downside target since they tend to be lures, so maybe we are close to a low, but that's where we find out if emotions will trump the technical support areas.
The longer term chart shows yesterday's move did break the rising support line. I have a general rule that we should wait for 3 to 5 closes below support (or above resistance) before confirming a breakdown or breakout, but with volatility so high its understandable how dangerous that could be if stocks continue to tumble at yesterday's rate. But when key support gets taken out, it usually triggers stop loss orders on the other side of that support, and that's when you can see capitulation selling and a reversal.
DWCPF (S-fund, small caps) broke down from several potential support levels over the last couple of months, and yesterday it also finally filled that large open gap from June. There is a smaller open gap down by 1600, but the June gap was always in the rear-view mirror as a possibility, although up until a couple of weeks ago, I thought the 200-day EMA might prevent it from filling it. Nope. The September / October seasonality got it.
Oil was up yesterday so it was a triple whammy with yields and the dollar up as well. Also, while writing this on Tuesday evening, I saw that Kevin McCarthy was voted out as the Speaker of the House. I don't know if that will have any impact on stocks and bonds but we still have to deal with the budget negotiations in a few weeks after they kicked the can down the road over the weekend. Will we have a new Speaker by then? More chaos.
This is the type of environment, and the season, that can create a crash. However, they are very rare and it is more likely that we get a big bounce, but I can't rule out the possibility.
We get the September Jobs Report and estimates are looking for a gain of about 150,000 jobs. That would be below Augusts' number but still not recessionary by any means. The unemployment rate is expected to drop to 3.7%.
Admin Note: Free Trial this week! Get the daily Last Look Report sent to you FREE! - No obligation
More info about The Last Look Report
Here's the top performing accounts in the AutoTracker for September. Congratulations to the winners! You've got to be in it, to win it.
The EFA (I-fund) followed up Monday's breakdown with more selling pushing it further below support. Until the dollar cools off, this looks like trouble, but snap back rallies could be impressive.
BND (bonds / F-fund) -- what can you say? This is a bad sell off in bonds, one of the worst that I can remember, and maybe, just maybe, the bleeding will stop once that giant gap is filled. Remember that gap? That's when everyone was sure that inflation was going to be contained after a better than expected CPI report.
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
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]
Bonds are selling off, but why do bond prices go down? They go down as yields go up and the world is focused on the 10-year yield. Bonds are being sold, and the bond market is actually a lot bigger than our stock market, believe it or not. Much of the selling has come from China this year and they own a lot of our bonds.
When bonds are being sold, it decreases asset liquidity meaning there is less money for investing. We have also seen the Fed reducing their balance sheet dramatically this year. Both of these strengthens the dollar and helps reduce inflation, and we have seen evidence of that. Just as prices go up when the dollar is weakening, prices get negatively impacted as the dollar gets stronger. So, the market is adjusting to all of this now.
As I mentioned yesterday Art Cashen talked about the 4.7% level on the 10-year Treasury Yield being a warning sign for stocks and it flew past that yesterday closing at 4.80%. He also said that, "October is the month for bottoms", so we'll see if he can hit the exacta.
This mess all started years ago with 0% interest rates and eventually the excess spending during the COVID recovery, and I'm not saying whether or not that spending was necessary or not -- I'll leave that for you to decide -- but it did put massive liquidity and cash into the system, which eventually led to sky rocketing inflation, which led to higher interest rates, and many predict that will eventually be an anchor on the economy and send us into a recession. It's the economic circle of life.
Now the question is, when will the selling in stocks be done? It is starting to feel exhausted now, but someone still has to step up and do some buying. It could take some kind of catalyst to change the direction whether it be an intervention from the Fed, the upcoming earnings season, a break in the selling of bonds, who knows? Today? Next week? Next month?
The action leading up to yesterday's sell off was odd in that small caps, for instance, did well on Thursday and Friday of last week when other parts of the market were struggling, but they relented on Monday. And on Monday the Nasdaq was up big yet yesterday they sold off hard and lagged the S&P 500, so it's odd but perhaps when everything is going down, we are getting closer to a capitulation where everyone gives up and the market finally runs out of sellers.
That actually happened in the Utilities yesterday - one of the few areas of the market that was up yesterday. This is what capitulation looks like after Utilities had been getting destroyed in recent months. It was down sharply early, rallied back and closed near the highs with a big gain. Not shown is that is also came on very high trading volume.
So what do you do if you're in stocks, or out? If in, sometimes just selling will help clear your head to help you make a better decision. Of course the risk to that is that stocks could take off again right after you sell, and if you happen to be out of transfers for the month, you're screwed. If you're out of stocks you're wondering when it is time to get back in, and the risk of waiting is that you could miss some of the big days that come off market bottoms. If capital preservation is your main goal then the more defensive approach would make more sense. If growth is your goal, then getting more aggressive after a near 10% correction in the S&P could give you a good risk / reward. There's no one right way to play it.
We'll look at some charts but sometimes technical analysis takes a back seat to emotional trading and charts can overshoot. That can happen in bull and bear markets, but that's what makes picking tops and bottoms so tough.
The S&P 500 (C-fund) fell through the 200-day EMA yesterday after several successful tests had held. There was an open gap from early June that could have been the downside target since they tend to be lures, so maybe we are close to a low, but that's where we find out if emotions will trump the technical support areas.
The longer term chart shows yesterday's move did break the rising support line. I have a general rule that we should wait for 3 to 5 closes below support (or above resistance) before confirming a breakdown or breakout, but with volatility so high its understandable how dangerous that could be if stocks continue to tumble at yesterday's rate. But when key support gets taken out, it usually triggers stop loss orders on the other side of that support, and that's when you can see capitulation selling and a reversal.
DWCPF (S-fund, small caps) broke down from several potential support levels over the last couple of months, and yesterday it also finally filled that large open gap from June. There is a smaller open gap down by 1600, but the June gap was always in the rear-view mirror as a possibility, although up until a couple of weeks ago, I thought the 200-day EMA might prevent it from filling it. Nope. The September / October seasonality got it.
Oil was up yesterday so it was a triple whammy with yields and the dollar up as well. Also, while writing this on Tuesday evening, I saw that Kevin McCarthy was voted out as the Speaker of the House. I don't know if that will have any impact on stocks and bonds but we still have to deal with the budget negotiations in a few weeks after they kicked the can down the road over the weekend. Will we have a new Speaker by then? More chaos.
This is the type of environment, and the season, that can create a crash. However, they are very rare and it is more likely that we get a big bounce, but I can't rule out the possibility.
We get the September Jobs Report and estimates are looking for a gain of about 150,000 jobs. That would be below Augusts' number but still not recessionary by any means. The unemployment rate is expected to drop to 3.7%.
Admin Note: Free Trial this week! Get the daily Last Look Report sent to you FREE! - No obligation
More info about The Last Look Report
Here's the top performing accounts in the AutoTracker for September. Congratulations to the winners! You've got to be in it, to win it.
The EFA (I-fund) followed up Monday's breakdown with more selling pushing it further below support. Until the dollar cools off, this looks like trouble, but snap back rallies could be impressive.
BND (bonds / F-fund) -- what can you say? This is a bad sell off in bonds, one of the worst that I can remember, and maybe, just maybe, the bleeding will stop once that giant gap is filled. Remember that gap? That's when everyone was sure that inflation was going to be contained after a better than expected CPI report.
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
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.
