Stocks opened lower on Friday but spent the rest of the day battling back during an options expiration day in oversold conditions. The S&P 500 got back to even on the day and the Nasdaq did close with a modest loss, but the Dow and small caps closed higher up, as did the Transportation Index. The charts don't look great but they aren't completely broken yet. The bad news is piling up so can stocks rebound to try to salvage something positive the last half of August?
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The good news for the bulls today, the last seven Mondays have been positive. The bad news - all three Tuesdays and Wednesdays in August have been negative. But there's also an old saying about once you notice a pattern like that, it's probably about to end because everyone else is seeing it as well.
So August has been brutal and after 13 trading days there have been no 2-day rallies and and only 3 of the 13 days have been positive for the S&P 500. When you get action like this you start to think about a couple of things: Is the market about to have a nice rebound, or is it about to crash?
Crashes are rare but we just had one in 2020 and it blindsided many investors because most of us had been conditioned to buy dips after a strong 2019. The same with this market which, if you weren't buying dips in 2023, you probably missed most of the gains, and the dips had been very shallow until this month so many of us got caught buying early this month when we saw the first 4-day losing streak since early May.
In 2020, the rare crash situation, the S&P 500 sunk 10% in matter of days, while this recent 3-week pullback declined about 6% from the late July high down to Friday's low. The eventual damage from high to low during the Covid crash was a 35% decline. It lasted just over a month. There were no 2-day rallies the whole time, but some of the one day rallies were explosive.
The first 2-day rally turned out to be off the bottom in late March that year. That's extremely rare and the chances that this is happening again right now is likely remote. Not impossible I suppose, but it's not like we have a global pandemic brewing.
So, things can get bad, and very bad, but that's less likely than the chances of some kind of a playable snap back rallies here and there, even if the market does struggle for a while.
If stocks start to bounce the headlines might get more positive, but investor sentiment toward the market has been sinking quickly from their lofty late July numbers. The CNN Fear / Greed Index, which is a scale from 0 (extreme fear) to 100 (extreme greed) fell from the mid-80's a month ago to the current 45.
And why not? Stocks are down, interest rates and yields are up, and bad news sells so it's not surprising, but somewhat disheartening, to see headlines throughout the Wall Street Journal this weekend like this:
Why the Era of Historically Low Interest Rates Could Be Over
Mortgage Rates Hit 7.09%, Highest in More Than 20 Years
Why Fitch’s Downgrade Matters
Why Child-Care Prices Are Rising at Nearly Twice the Overall Inflation Rate
China’s Economic Woes Are Pushing Its Currency Toward a Record Low
China’s Drop in Exports Signals Deepening Slowdown in Global Trade
The question is whether the mood has turned sour, so quickly, that it could ignite one of those big snap back rallies to take investors by surprise? It happens, but if the intermediate-term top is in, that rally may have to be sold. Whether it's a big one day rally, or a multi-day rally we don't know, but multi is more likely. Even during the 2022 bear market, which was a brutal market by any measure, we had several large rebounds that lasted weeks, and even months before the bottom was made in October.
The charts are weakening now but they haven't completely broken yet. In the short-term the S&P 500 has been down for 4 straight days and it hasn't been down 5 straight all year. What I am looking at now as a possible setup is something I talked about last week.
Options expiration week has an historical bullish bias, and of course that wasn't the case last week. But sometimes the action prior to expiration day is reversed in the week following. I looked back at last year and it was a good example, but it was more traditional in that stocks were up leading up to expiration Friday, then reversed down the week after. Will 2023 flip this chart around, or is it finally game on for the bears who may be smelling blood in the water?
The Yield on the 10-year Treasury has been rising steadily this summer despite some waning inflation numbers. Now it may be about actual growth which could, in turn, reignite inflation, and that has the Fed concerned. However, the TNX chart, both short and long term, is hitting quite a bit of overhead resistance so there is an opening for a little reprieve from the rally in yields and sell off in bonds and the F-fund.
The Fed Balance sheet was reduced by another $63 billion last week and you can see that it continues to slide lower since the regional banking crisis back in March.
This reduction in the balance sheet is helping keeping the dollar strong, which can be a problem for prices in general, and obviously the I-fund in particular for those of you who have been following this for a while.
The market has an excuse to rally this week despite the deteriorating charts and questionable fundamentals. Nvidia will be reporting earnings after the bell on Wednesday and it was their previous report three months ago that was the most important piece of the bull market puzzle that triggered the May through July rally. Their optimistic guidance based on their A-I business sent stocks rallying for a couple of months. Here they have a chance to end the current pullback, or perhaps pour more fuel on the current fire if they disappoint this time.
The S&P 500 (C-fund) was down precipitously last week in between Monday's rally and Friday's positive reversal. It landed below the key support of the 50-day EMA, and a couple of support lines. Friday's low was near the breakout candle low from late June. It could be a temporary landing area or, if the open gap near 4235 and other breakout candle lows need to get tested, then the pullback could continue - whether we get a relief rally in there somewhere first, or not.
DWCPF (S-fund) also landed on a breakout candle low on Friday before reversing higher, and closing back above the 200-day EMA after a brief break under it. It is below some stubborn resistance, and even if it can get back above that descending blue line off the highs or not, any relief rally still has the potential to become the right shoulder of a head and shoulders pattern.
EFA (I-fund) also fell below, but recaptured, its 200-day EMA on Friday. The bear flag breakdown didn't take long to reach the flag's downside target. Now the question is whether it can rebound from there. Often a bear flag breakdown becomes the flag pole of a new bear flag so the angle of any relief rally this week will be important to watch. If it looks anything like the one earlier this month, watch for another leg lower. If we see a "V" bottom instead, things would improve.
BND (Bonds / F-fund) tried to find support at the the bottom of that large descending trading channel last week, and for a second day it held. If the yield on the 10-year Treasury (see chart up top) holds at resistance, this chart will have an opportunity for some relief as well, but the old broken support areas can try to stop it from going to higher.
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.
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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[TR]
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[TD="width: 338, align: center"] Daily TSP Funds Return
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The good news for the bulls today, the last seven Mondays have been positive. The bad news - all three Tuesdays and Wednesdays in August have been negative. But there's also an old saying about once you notice a pattern like that, it's probably about to end because everyone else is seeing it as well.
So August has been brutal and after 13 trading days there have been no 2-day rallies and and only 3 of the 13 days have been positive for the S&P 500. When you get action like this you start to think about a couple of things: Is the market about to have a nice rebound, or is it about to crash?
Crashes are rare but we just had one in 2020 and it blindsided many investors because most of us had been conditioned to buy dips after a strong 2019. The same with this market which, if you weren't buying dips in 2023, you probably missed most of the gains, and the dips had been very shallow until this month so many of us got caught buying early this month when we saw the first 4-day losing streak since early May.
In 2020, the rare crash situation, the S&P 500 sunk 10% in matter of days, while this recent 3-week pullback declined about 6% from the late July high down to Friday's low. The eventual damage from high to low during the Covid crash was a 35% decline. It lasted just over a month. There were no 2-day rallies the whole time, but some of the one day rallies were explosive.
The first 2-day rally turned out to be off the bottom in late March that year. That's extremely rare and the chances that this is happening again right now is likely remote. Not impossible I suppose, but it's not like we have a global pandemic brewing.
So, things can get bad, and very bad, but that's less likely than the chances of some kind of a playable snap back rallies here and there, even if the market does struggle for a while.
If stocks start to bounce the headlines might get more positive, but investor sentiment toward the market has been sinking quickly from their lofty late July numbers. The CNN Fear / Greed Index, which is a scale from 0 (extreme fear) to 100 (extreme greed) fell from the mid-80's a month ago to the current 45.
And why not? Stocks are down, interest rates and yields are up, and bad news sells so it's not surprising, but somewhat disheartening, to see headlines throughout the Wall Street Journal this weekend like this:
Why the Era of Historically Low Interest Rates Could Be Over
Mortgage Rates Hit 7.09%, Highest in More Than 20 Years
Why Fitch’s Downgrade Matters
Why Child-Care Prices Are Rising at Nearly Twice the Overall Inflation Rate
China’s Economic Woes Are Pushing Its Currency Toward a Record Low
China’s Drop in Exports Signals Deepening Slowdown in Global Trade
The question is whether the mood has turned sour, so quickly, that it could ignite one of those big snap back rallies to take investors by surprise? It happens, but if the intermediate-term top is in, that rally may have to be sold. Whether it's a big one day rally, or a multi-day rally we don't know, but multi is more likely. Even during the 2022 bear market, which was a brutal market by any measure, we had several large rebounds that lasted weeks, and even months before the bottom was made in October.
The charts are weakening now but they haven't completely broken yet. In the short-term the S&P 500 has been down for 4 straight days and it hasn't been down 5 straight all year. What I am looking at now as a possible setup is something I talked about last week.
Options expiration week has an historical bullish bias, and of course that wasn't the case last week. But sometimes the action prior to expiration day is reversed in the week following. I looked back at last year and it was a good example, but it was more traditional in that stocks were up leading up to expiration Friday, then reversed down the week after. Will 2023 flip this chart around, or is it finally game on for the bears who may be smelling blood in the water?
The Yield on the 10-year Treasury has been rising steadily this summer despite some waning inflation numbers. Now it may be about actual growth which could, in turn, reignite inflation, and that has the Fed concerned. However, the TNX chart, both short and long term, is hitting quite a bit of overhead resistance so there is an opening for a little reprieve from the rally in yields and sell off in bonds and the F-fund.
The Fed Balance sheet was reduced by another $63 billion last week and you can see that it continues to slide lower since the regional banking crisis back in March.
This reduction in the balance sheet is helping keeping the dollar strong, which can be a problem for prices in general, and obviously the I-fund in particular for those of you who have been following this for a while.
The market has an excuse to rally this week despite the deteriorating charts and questionable fundamentals. Nvidia will be reporting earnings after the bell on Wednesday and it was their previous report three months ago that was the most important piece of the bull market puzzle that triggered the May through July rally. Their optimistic guidance based on their A-I business sent stocks rallying for a couple of months. Here they have a chance to end the current pullback, or perhaps pour more fuel on the current fire if they disappoint this time.
The S&P 500 (C-fund) was down precipitously last week in between Monday's rally and Friday's positive reversal. It landed below the key support of the 50-day EMA, and a couple of support lines. Friday's low was near the breakout candle low from late June. It could be a temporary landing area or, if the open gap near 4235 and other breakout candle lows need to get tested, then the pullback could continue - whether we get a relief rally in there somewhere first, or not.
DWCPF (S-fund) also landed on a breakout candle low on Friday before reversing higher, and closing back above the 200-day EMA after a brief break under it. It is below some stubborn resistance, and even if it can get back above that descending blue line off the highs or not, any relief rally still has the potential to become the right shoulder of a head and shoulders pattern.
EFA (I-fund) also fell below, but recaptured, its 200-day EMA on Friday. The bear flag breakdown didn't take long to reach the flag's downside target. Now the question is whether it can rebound from there. Often a bear flag breakdown becomes the flag pole of a new bear flag so the angle of any relief rally this week will be important to watch. If it looks anything like the one earlier this month, watch for another leg lower. If we see a "V" bottom instead, things would improve.
BND (Bonds / F-fund) tried to find support at the the bottom of that large descending trading channel last week, and for a second day it held. If the yield on the 10-year Treasury (see chart up top) holds at resistance, this chart will have an opportunity for some relief as well, but the old broken support areas can try to stop it from going to higher.
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.
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.
