Stocks sold off on Friday following another inflationary pricing report - this one the PPI after Tuesday's hot CPI. The Dow lost 145-points and the losses were fairly broad, although the I-fund held onto some gains - mostly because the selling came late in the US and overseas markets hadn't reacted. Yields and the dollar were up on the PPI report and that put the pressure on the stock and bond markets.
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The S&P 500 has been sticky to the upside for most of the year despite the fact that the rally began in October when the Fed was basically telling us that interest rates would come down in 2024, but instead growth and inflation numbers have been coming in hotter than expected this year decreasing the chances of interest rates coming down.
Is the market applauding the unexpected growth and the fact that rates may not have to come down as the chances of a recession wane? It's really tough to say since the Fed has done its rug pull on the lower rates idea, and for years it seemed as if the only thing the market cared about was the direction of interest rates.
Now we have chart like this, which is a long-term weekly chart showing the S&P 500 is now about 25% above its 200-week moving average. The bad news for stocks is that it doesn't generally get much more above the 200-week average than that, although you can see a few exceptions. One of those was post COVID when money was cheap and flowing freely so stocks were the only game in town. However, up here the market is vulnerable to a pullback, but timing that can be tough. The red flags are everywhere because of the extremes, but there are a lot of good things showing up on other charts.
Another option is that the S&P can remain 25% above a rising 200-week average like it did for a couple of years from about 2017 until the sell off in late 2018. And again after COVID, as I mentioned.
So, would it be the worst thing in the world if the Fed did not cut rates and instead the economy grew faster than expected? Inflation isn't a bad thing if it is contained so 2% or so with a growing economy may be good news for stocks.
Another possible sign that the economy is strengthening is the price of oil stabilizing and moving back above its major moving averages, as it did last week. The one issue I see here is that this rally could be a part of a big bear flag, which tend to eventually break down. We'll have to see if this chart can hold above those moving averages for any length of time to confirm this potential breakout.
As for the market action, we know the S&P 500 recently moved above 5000 and made an all time closing high. The question has been whether the rally can broaden out and take the small and mid-cap stocks up with those large cap tech stocks. This chart shows the ratio between the S-fund (dwcps) and the S&P 500 (C-fund). It's an ugly chart showing us how the small caps have been lagging for years, but we saw a small ray of hope last week and there is a potential higher low being made on the chart after the spike lower at the end of 2023.
A closer look shows the uptick at the early 2023 lows, and that may be a bullish inverted head and shoulders pattern. If this fails to hold above that blue horizontal line near 0.39, then all bets are off, but if it can get and stay above 0.39 or 0.40 then we could be at the start of a shift into a broader rally, which means small caps would be back in play.
The EFA (I-fund) has been trailing the S&P 500 miserably for a long time. Last year however, there was a possible break in the downtrend in the ratio. It did pop higher but fail at the 200 week average last year, but if it can hold above that blue horizontal line at the 2022 low, and stay above the descending orange dashed line, we could also see a shift in the I-fund as well.
This is a post options expiration week and we are entering the weaker half of February on the seasonality chart, so perhaps there is some backing and filling coming from the lofty levels of the S&P 500, but as noted above, good things are happening and dips may be welcomed from investors who may not have enough exposure to stocks. Investor sentiment is also quite bullish so a little pullback could help take us off some of these extremes we've seen.
The S&P 500 (C-fund) is still flirting with the all time highs but it's stumbling a bit near that negative reversal high from last Monday. The CPI report shook things up last week and the S&P spent the rest of the week trying to fill that gap, and despite the sell off on Friday, it did manage to close above 5000 for the week. Right now it's a battle between strong momentum on the upside, and an overstretched chart that has resistance near 5050.
DWCPF (S-fund) bounced right back last week after the CPI debacle. It made a new high for the year on Thursday but pulled back again on Friday after the PPI report. There's a small open gap just below Friday's close, and then there's the prior high in the same area that may try to act as support now. The red arrows are negative reversal days. Those are usually short term trouble but we have seen a few on this chart that didn't do any damage.
The EFA (I-fund) attempted to breakout last week and while it did make a new intraday and closing high for the year on Friday with a moderate gain, it did close off the highs of the day and back below the breakout line. Maybe it needs to back and fill that open gap near 75.10. The spinning top formation can be a sign of a direction change which could mean that gap gets fill, or even another test of the bottom of that channel? A close above the top of the channel would be ideal.
BND (bonds / F-fund) was down sharply on Friday as yields moved up after the 2nd inflationary report was released on Friday. There is a small open gap from December that was nearly filled last week, but not quite. The bullish looking flag suggests a possible good outcome here, but there has certainly been no rush to get into the bond market recently as yields stay stubbornly high.
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.
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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The S&P 500 has been sticky to the upside for most of the year despite the fact that the rally began in October when the Fed was basically telling us that interest rates would come down in 2024, but instead growth and inflation numbers have been coming in hotter than expected this year decreasing the chances of interest rates coming down.
Is the market applauding the unexpected growth and the fact that rates may not have to come down as the chances of a recession wane? It's really tough to say since the Fed has done its rug pull on the lower rates idea, and for years it seemed as if the only thing the market cared about was the direction of interest rates.
Now we have chart like this, which is a long-term weekly chart showing the S&P 500 is now about 25% above its 200-week moving average. The bad news for stocks is that it doesn't generally get much more above the 200-week average than that, although you can see a few exceptions. One of those was post COVID when money was cheap and flowing freely so stocks were the only game in town. However, up here the market is vulnerable to a pullback, but timing that can be tough. The red flags are everywhere because of the extremes, but there are a lot of good things showing up on other charts.
Another option is that the S&P can remain 25% above a rising 200-week average like it did for a couple of years from about 2017 until the sell off in late 2018. And again after COVID, as I mentioned.
So, would it be the worst thing in the world if the Fed did not cut rates and instead the economy grew faster than expected? Inflation isn't a bad thing if it is contained so 2% or so with a growing economy may be good news for stocks.
Another possible sign that the economy is strengthening is the price of oil stabilizing and moving back above its major moving averages, as it did last week. The one issue I see here is that this rally could be a part of a big bear flag, which tend to eventually break down. We'll have to see if this chart can hold above those moving averages for any length of time to confirm this potential breakout.
As for the market action, we know the S&P 500 recently moved above 5000 and made an all time closing high. The question has been whether the rally can broaden out and take the small and mid-cap stocks up with those large cap tech stocks. This chart shows the ratio between the S-fund (dwcps) and the S&P 500 (C-fund). It's an ugly chart showing us how the small caps have been lagging for years, but we saw a small ray of hope last week and there is a potential higher low being made on the chart after the spike lower at the end of 2023.
A closer look shows the uptick at the early 2023 lows, and that may be a bullish inverted head and shoulders pattern. If this fails to hold above that blue horizontal line near 0.39, then all bets are off, but if it can get and stay above 0.39 or 0.40 then we could be at the start of a shift into a broader rally, which means small caps would be back in play.
The EFA (I-fund) has been trailing the S&P 500 miserably for a long time. Last year however, there was a possible break in the downtrend in the ratio. It did pop higher but fail at the 200 week average last year, but if it can hold above that blue horizontal line at the 2022 low, and stay above the descending orange dashed line, we could also see a shift in the I-fund as well.
This is a post options expiration week and we are entering the weaker half of February on the seasonality chart, so perhaps there is some backing and filling coming from the lofty levels of the S&P 500, but as noted above, good things are happening and dips may be welcomed from investors who may not have enough exposure to stocks. Investor sentiment is also quite bullish so a little pullback could help take us off some of these extremes we've seen.
The S&P 500 (C-fund) is still flirting with the all time highs but it's stumbling a bit near that negative reversal high from last Monday. The CPI report shook things up last week and the S&P spent the rest of the week trying to fill that gap, and despite the sell off on Friday, it did manage to close above 5000 for the week. Right now it's a battle between strong momentum on the upside, and an overstretched chart that has resistance near 5050.
DWCPF (S-fund) bounced right back last week after the CPI debacle. It made a new high for the year on Thursday but pulled back again on Friday after the PPI report. There's a small open gap just below Friday's close, and then there's the prior high in the same area that may try to act as support now. The red arrows are negative reversal days. Those are usually short term trouble but we have seen a few on this chart that didn't do any damage.
The EFA (I-fund) attempted to breakout last week and while it did make a new intraday and closing high for the year on Friday with a moderate gain, it did close off the highs of the day and back below the breakout line. Maybe it needs to back and fill that open gap near 75.10. The spinning top formation can be a sign of a direction change which could mean that gap gets fill, or even another test of the bottom of that channel? A close above the top of the channel would be ideal.
BND (bonds / F-fund) was down sharply on Friday as yields moved up after the 2nd inflationary report was released on Friday. There is a small open gap from December that was nearly filled last week, but not quite. The bullish looking flag suggests a possible good outcome here, but there has certainly been no rush to get into the bond market recently as yields stay stubbornly high.
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.
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.
