Stocks opened slightly higher on Friday but failed to get any traction and the quickly bears took over, so the Tuesday thru Thursday rally was sandwiched between selling on Monday and Friday, but the final result was some decent gains for the stock funds last week. Bonds also came to life as the F-fund gained 1.2% on the week. With a week left in the month the indices still have some decent gains in July as we head into a very busy week of earnings plus a Fed meeting.
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Friday's action wasn't great but we have seen a couple of very heavy positive volume days recently which historically has indicated a shift in a bear market. It doesn't mean the downside is done, but there is some bullish activity under he surface suggesting that is possible. We still have not seen a high volume panic like sell off which would be a better indication of a capitulation low, and maybe (just pure speculation) this week will have the catalysts to see something like that with the FOMC meeting and rate hike on Wednesday, and earnings from 5 mega-cap market moving companies.
I have shown this comparison before and it remains in the back of my mind as a reminder that we haven't seen a major panic low yet based on volatility: This chart from back on July 8 shows the ratio of the shorter term VIX (Volatility Index) vs. the longer term VXZ. Over the years going back to the financial crisis, most of the corrections and bear markets bottomed after we saw a spike in this ratio up to at least 1.25. So far in 2022 we haven't seen anything like that yet. This is a couple of weeks old and right now the ratio is actually down to 0.80 (I drew in the current 0.80 reading on the chart), a far cry from a panic low reading that tends to end a solid correction or bear market.
The 10-year Treasury yield is looking very shaky as the market braces for a recessionary environment. The head and shoulders pattern suggests a breakdown to much lower yields that would help bond prices (BND) and the F-fund, which was breaking out last week.
The price of oil closed the week below $100 a barrel at 94.70, and unless the 200-day EMA can hold, it looks lie it may want to go lower.
Copper is floundering in the lows 3's and the bear flag suggests it could go lower.
Both of those could be signs that the Fed's attempt to put the breaks on inflation is working, and thus demand for these commodities is shrinking.
But what does that mean for us? Lower oil prices and sinking bond yields may be indicating that we are seeing results from the Fed's rate hikes and perhaps together both of these will in turn potentially set up a good situation for the consumer. Since the market tends to lead the data, we could see stocks trying to form a bottom even while the worst may not be over for the economy.
The question is a matter of timing. Could stocks make a lower low - for sure. Based on seasonally alone it wouldn't be a surprise to see more downside in the normally tough months of August or September. But if the market is out in front of the data perhaps once the Fed hikes rates and we get earnings out of the way, investors can decide if the worst is over for this bear market and recession, which is almost inevitable, but sometimes by the time that we get confirmation that a recession is here, the worst really is over.
The Dow Transportation Index is a great indicator of economic strength or weakness and it seems to be trying to perk up despite the fact that commodities and demand are indicating a slowdown. You can see that area below 13,000 was the low in June and so far in July it was tested and held despite all of the recent bad news. We have a possible bull flag forming but we did see a similar formation near the end of May that eventually failed. The difference this time is that it is back over its 50-day EMA and the descending resistance line.
So we are seeing some good signs, but the Fed is still tightening, prices are still an issue for consumers, earnings are being adjusted down and maybe the market hasn't quite priced that in yet, so that is one reason I think we could have another leg lower into the early fall, and maybe that will give us the capitulation spike in the VIX that we may need to see before all of this is over.
I'm getting a little more optimistic but still playing defense, being very selective, and staying nimble with my buying and selling.
The S&P 500 (C-fund) just about filled that gap near 4017 on Friday - the high was 4012, before starting to pull back again. The bearish looking flag is certainly dragging on longer than expected so it may in fact not be a bear flag, but while it is below resistance I have to give the bears the benefit of the doubt, although it wouldn't take that much more upside to kill the flag. There is still a small open gap down near 3800 that could be in play during a volatile Fed / earnings week.
The weekly S&P 500 chart still shows the bear flag in red, but the index did close above the descending resistance line of that wedge-like formation. Filling that gap on the daily chart near 3800 would still satisfy this chart as holding, as long as it doesn't go much lower than that.
The DWCPF (S-fund) didn't quite fill its overhead gap either before pulling back on Friday, and it closed just a fraction below its 50-day EMA near 1663. That 1600 down to 1560 area looks like it could be formidable support if tested on any further downside.
EFA (I-fund) failed at the 50-day EMA, leaving those two overhead gaps open for another day. Still in a downtrend. Still below the 50-day EMA. The dollar has been strong, and that is all the bad news for the I-fund. The good news in the short-term based on the chart is that a move up to about 66 would fill the gaps and test the upper end of the blue descending channel. From there it would need help.
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 for reading. We'll see you back here tomorrow.
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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Friday's action wasn't great but we have seen a couple of very heavy positive volume days recently which historically has indicated a shift in a bear market. It doesn't mean the downside is done, but there is some bullish activity under he surface suggesting that is possible. We still have not seen a high volume panic like sell off which would be a better indication of a capitulation low, and maybe (just pure speculation) this week will have the catalysts to see something like that with the FOMC meeting and rate hike on Wednesday, and earnings from 5 mega-cap market moving companies.
I have shown this comparison before and it remains in the back of my mind as a reminder that we haven't seen a major panic low yet based on volatility: This chart from back on July 8 shows the ratio of the shorter term VIX (Volatility Index) vs. the longer term VXZ. Over the years going back to the financial crisis, most of the corrections and bear markets bottomed after we saw a spike in this ratio up to at least 1.25. So far in 2022 we haven't seen anything like that yet. This is a couple of weeks old and right now the ratio is actually down to 0.80 (I drew in the current 0.80 reading on the chart), a far cry from a panic low reading that tends to end a solid correction or bear market.
The 10-year Treasury yield is looking very shaky as the market braces for a recessionary environment. The head and shoulders pattern suggests a breakdown to much lower yields that would help bond prices (BND) and the F-fund, which was breaking out last week.
The price of oil closed the week below $100 a barrel at 94.70, and unless the 200-day EMA can hold, it looks lie it may want to go lower.
Copper is floundering in the lows 3's and the bear flag suggests it could go lower.
Both of those could be signs that the Fed's attempt to put the breaks on inflation is working, and thus demand for these commodities is shrinking.
But what does that mean for us? Lower oil prices and sinking bond yields may be indicating that we are seeing results from the Fed's rate hikes and perhaps together both of these will in turn potentially set up a good situation for the consumer. Since the market tends to lead the data, we could see stocks trying to form a bottom even while the worst may not be over for the economy.
The question is a matter of timing. Could stocks make a lower low - for sure. Based on seasonally alone it wouldn't be a surprise to see more downside in the normally tough months of August or September. But if the market is out in front of the data perhaps once the Fed hikes rates and we get earnings out of the way, investors can decide if the worst is over for this bear market and recession, which is almost inevitable, but sometimes by the time that we get confirmation that a recession is here, the worst really is over.
The Dow Transportation Index is a great indicator of economic strength or weakness and it seems to be trying to perk up despite the fact that commodities and demand are indicating a slowdown. You can see that area below 13,000 was the low in June and so far in July it was tested and held despite all of the recent bad news. We have a possible bull flag forming but we did see a similar formation near the end of May that eventually failed. The difference this time is that it is back over its 50-day EMA and the descending resistance line.
So we are seeing some good signs, but the Fed is still tightening, prices are still an issue for consumers, earnings are being adjusted down and maybe the market hasn't quite priced that in yet, so that is one reason I think we could have another leg lower into the early fall, and maybe that will give us the capitulation spike in the VIX that we may need to see before all of this is over.
I'm getting a little more optimistic but still playing defense, being very selective, and staying nimble with my buying and selling.
The S&P 500 (C-fund) just about filled that gap near 4017 on Friday - the high was 4012, before starting to pull back again. The bearish looking flag is certainly dragging on longer than expected so it may in fact not be a bear flag, but while it is below resistance I have to give the bears the benefit of the doubt, although it wouldn't take that much more upside to kill the flag. There is still a small open gap down near 3800 that could be in play during a volatile Fed / earnings week.
The weekly S&P 500 chart still shows the bear flag in red, but the index did close above the descending resistance line of that wedge-like formation. Filling that gap on the daily chart near 3800 would still satisfy this chart as holding, as long as it doesn't go much lower than that.
The DWCPF (S-fund) didn't quite fill its overhead gap either before pulling back on Friday, and it closed just a fraction below its 50-day EMA near 1663. That 1600 down to 1560 area looks like it could be formidable support if tested on any further downside.
EFA (I-fund) failed at the 50-day EMA, leaving those two overhead gaps open for another day. Still in a downtrend. Still below the 50-day EMA. The dollar has been strong, and that is all the bad news for the I-fund. The good news in the short-term based on the chart is that a move up to about 66 would fill the gaps and test the upper end of the blue descending channel. From there it would need help.
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 for reading. We'll see you back here tomorrow.
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.
