The stock market did not like the sound of another inflationary report as stocks sold off after a hotter than expected PPI (Producer Price Index) report sent yields up even higher. The bulls made a move off the morning to lows to erase most of the losses, but another wave of selling in the final hour of trading took the indices back to the lows of the day by the close. The Dow lost 431-points and the Nasdaq lagged with a loss of 1.8%. Small caps actually went positive during the midday rally but it fell into the close with the rest of the market to lose 1.2% on the day.
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Of course bond yields were up again after that hot pricing data which has been the trend, although stronger than expected economic data, led by the jobs market, is also part of the rally in yields.
I was wondering if the bond market or the stock market was correct because it didn't seem feasible that stocks would hold up so well in the face of a Fed who has been given ample ammunition to continue to keep tightening their monetary policy. That said, historically it is quite common for stocks and yields to move in the same direction as it is generally an indication of the direction of the economy, although that oversimplifies the comparison.
So, if the economy is roaring and the labor market is strong, then we tend to see yields move higher, and stocks would tend to move higher as well in that case. But coming off of 0% interest rates at the speed at which the Fed is moving has been causing some havoc over the last year, until recently when yields and stocks started to move up together.
If you've been reading these commentaries recently, you know that I have been suspicious about something going on that perhaps we aren't aware of that is causing this divergence from the action of the last year. That is, why were yields and stocks moving up together all of a sudden? I may have found an answer:
Markets ride $1 trillion global liquidity wave
"Largely thanks to the Bank of Japan hoovering up domestic government bonds to keep its 'yield curve control' policy intact, and stimulus from the People's Bank of China (PBOC), aggregate liquidity from the official sector has surged in recent months."
"Matt King, global strategist at Citi in London, estimates around $1 trillion has been pumped into the global system in the last few months, a vast sum in its own right but an especially large one given where central banks are in the policy cycle."
The article goes on to say:
But how long will this be sustained?
"While further gyrations in global liquidity seem likely to remain a major driver of markets, for now the sort of technical factors which added $1 trillion over the past quarter seem unlikely to repeat themselves"
The rally that this may have caused sure helped the charts out quite a bit and the bulls, including myself, couldn't help but join in on these bullish formations. Increased liquidity will add to inflation, but also make stock buying more attractive. But perhaps the stimulus that had been helping the market over the last few months is about to be taken away?
I don't like the sound of that, but I do get some satisfaction with some understanding about why the charts looked so good, yet underlying data, indicators, and sentiment were starting to tell a different story.
The 10-year Yield did fill that open gap yesterday and the prior peaks are just overhead near 3.9%. The question is whether those act as resistance, or if yields continue higher. If we start seeing 4.0% here the stocks market may have to adjust accordingly again.
I'll remind you again that the February seasonality chart hits a headwind starting today and basically lasts into the end of the month.
Chart provided courtesy of www.sentimentrader.com
Again, the charts look good and yesterday's action didn't hurt them yet, but the negative reversal day may make things tougher today. And if we see more downside then the key support starts to get tested and the rally will hit an important pivot point. Most of the inflationary data is out for this month so we shouldn't get too many more surprises, although even yesterday one of the Fed voting members was out with more hawkish talk and the market obviously didn't like it.
Holiday Closing per tsp.gov: "Some financial markets will be closed on Monday, February 20, in observance of Washington’s Birthday (President’s Day). The Thrift Savings Plan will also be closed. Transactions that would have been processed Monday night (February 20) will be processed Tuesday night (February 21) at Tuesday's closing share prices."
The S&P 500 (C-fund) had a nice looking bull flag breakout going but yesterday's action pushed it back into the flag, so it will have to prove itself all over again. The bull flag is still a bullish formation, but failures aren't great so my antennae are up for a possible shift. It hasn't happened yet and a little dip after the 50-day EMA crosses back above the 200-day EMA, which it just did, is not unusual. It's generally bullish for the intermediate term but could indicate a short-term overbought condition.
DWCPF (S-fund) is above descending support but below descending resistance. This doesn't look bad overall but the negative reversal day could give the bears some confidence back in the short-term. It's a matter of how much conviction they have, and how it compares to the confidence of the dip buyers.
The EFA (I-fund) was down but it held up fairly well in comparison to the US stocks, but of course the overseas markets closed much earlier in the day.
BND (Bonds / F-fund) fell below some possible key support and this may open the door for a move all the way down to, or into, the open gap near 69.50. The technical action just doesn't look as good as it did last month. Perhaps it is just a pullback in a bigger ascending trend, but that support breaking is a warning sign. I like to see 3 to 5 closed below support to confirm a breakdown.
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
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks so much for reading. Have a great weekend!
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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Of course bond yields were up again after that hot pricing data which has been the trend, although stronger than expected economic data, led by the jobs market, is also part of the rally in yields.
I was wondering if the bond market or the stock market was correct because it didn't seem feasible that stocks would hold up so well in the face of a Fed who has been given ample ammunition to continue to keep tightening their monetary policy. That said, historically it is quite common for stocks and yields to move in the same direction as it is generally an indication of the direction of the economy, although that oversimplifies the comparison.
So, if the economy is roaring and the labor market is strong, then we tend to see yields move higher, and stocks would tend to move higher as well in that case. But coming off of 0% interest rates at the speed at which the Fed is moving has been causing some havoc over the last year, until recently when yields and stocks started to move up together.
If you've been reading these commentaries recently, you know that I have been suspicious about something going on that perhaps we aren't aware of that is causing this divergence from the action of the last year. That is, why were yields and stocks moving up together all of a sudden? I may have found an answer:
Markets ride $1 trillion global liquidity wave
"Largely thanks to the Bank of Japan hoovering up domestic government bonds to keep its 'yield curve control' policy intact, and stimulus from the People's Bank of China (PBOC), aggregate liquidity from the official sector has surged in recent months."
"Matt King, global strategist at Citi in London, estimates around $1 trillion has been pumped into the global system in the last few months, a vast sum in its own right but an especially large one given where central banks are in the policy cycle."
The article goes on to say:
But how long will this be sustained?
"While further gyrations in global liquidity seem likely to remain a major driver of markets, for now the sort of technical factors which added $1 trillion over the past quarter seem unlikely to repeat themselves"
The rally that this may have caused sure helped the charts out quite a bit and the bulls, including myself, couldn't help but join in on these bullish formations. Increased liquidity will add to inflation, but also make stock buying more attractive. But perhaps the stimulus that had been helping the market over the last few months is about to be taken away?
I don't like the sound of that, but I do get some satisfaction with some understanding about why the charts looked so good, yet underlying data, indicators, and sentiment were starting to tell a different story.
The 10-year Yield did fill that open gap yesterday and the prior peaks are just overhead near 3.9%. The question is whether those act as resistance, or if yields continue higher. If we start seeing 4.0% here the stocks market may have to adjust accordingly again.
I'll remind you again that the February seasonality chart hits a headwind starting today and basically lasts into the end of the month.
Chart provided courtesy of www.sentimentrader.com
Again, the charts look good and yesterday's action didn't hurt them yet, but the negative reversal day may make things tougher today. And if we see more downside then the key support starts to get tested and the rally will hit an important pivot point. Most of the inflationary data is out for this month so we shouldn't get too many more surprises, although even yesterday one of the Fed voting members was out with more hawkish talk and the market obviously didn't like it.
Holiday Closing per tsp.gov: "Some financial markets will be closed on Monday, February 20, in observance of Washington’s Birthday (President’s Day). The Thrift Savings Plan will also be closed. Transactions that would have been processed Monday night (February 20) will be processed Tuesday night (February 21) at Tuesday's closing share prices."
The S&P 500 (C-fund) had a nice looking bull flag breakout going but yesterday's action pushed it back into the flag, so it will have to prove itself all over again. The bull flag is still a bullish formation, but failures aren't great so my antennae are up for a possible shift. It hasn't happened yet and a little dip after the 50-day EMA crosses back above the 200-day EMA, which it just did, is not unusual. It's generally bullish for the intermediate term but could indicate a short-term overbought condition.
DWCPF (S-fund) is above descending support but below descending resistance. This doesn't look bad overall but the negative reversal day could give the bears some confidence back in the short-term. It's a matter of how much conviction they have, and how it compares to the confidence of the dip buyers.
The EFA (I-fund) was down but it held up fairly well in comparison to the US stocks, but of course the overseas markets closed much earlier in the day.
BND (Bonds / F-fund) fell below some possible key support and this may open the door for a move all the way down to, or into, the open gap near 69.50. The technical action just doesn't look as good as it did last month. Perhaps it is just a pullback in a bigger ascending trend, but that support breaking is a warning sign. I like to see 3 to 5 closed below support to confirm a breakdown.
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
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks so much for reading. Have a great weekend!
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.
