Stocks rallied early on Monday and hung onto a portion of those gains into the close, but small caps took charge again, helping the S-fund lead on the upside. Short covering and rotation into small stocks by money managers are fueling the gains as months of underperformance are being repaired in short order. Yields falling are a big catalyst, but that also sets up a potential problem as we'll talk about.
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Anyone who has been invested in the S-fund this year knows that it has been a long, frustrating road as large cap tech stole the show for most of the year. It may be too early to claim a victory but for right now, the small caps are getting some revenge.
In the past we have seen the S-fund make some extreme parabolic moves - so big that it was really tough to catch the entire move as it seemed overly extreme. This current rally is only a fraction of what we have seen over the years when the S-fund gets hot. It would take another 14% move higher to get to the old all time highs of 2021. But you can also see that some of these parabolic rallies can deflate rather quickly once the run is over, so you have to be careful.
So, before I become a complacent bull, there are some issues that history suggests could be a problem. This may sound boring for those who want to hear only the news that produces endorphins in the brain, but you may want to see this.
The 10-year yield was up slightly yesterday but it has been hanging around the recent lows. That's good. The bad news is, the shorter term yields have been falling even faster. That means the 2-yr / 10-yr yield curve is steepening. Again, sounds good, since an inverted yield curve is bad, right?
The problem with yield curve inversions, when shorter term yields are paying more than longer term yields, is that they eventually unwind, and they tend to unwind when the economy is slowing and the Fed has to cut rates to try to keep it from falling into a recession. That's why an inverted yield curve tends to front run a recession by many months or even years.
You can see here that the yield curve has been steepening in recent weeks. We've seen these before in small spurts, and the S&P 500 either stalled or fell almost every time it happened.
Here is a longer term chart of the yield curve from 1999 to 2023 and again, once an inverted yield curve steepens and "un-inverts", the S&P 500 has experienced some rough times. And it has only inverted three times since the turn of the century. It came just short in 2019, not so coincidentally just before the COVID crash and recession.
OK, back to the bull market. Let's enjoy it while we can, but don't get too comfortable or complacent.
The S&P 500 (C-fund) continues to grind higher and is still overbought, but it is actually trying to consolidate a little over the last week, at least in relation to the move in the small caps.
DWCPF (S-fund) has had a parabolic move but we have seen these kind of rallies in small caps in the past that lasted a lot longer; longer than seems reasonable or sustainable. Is this a "HODL" situation, as the crypto people call it?
The EFA (I-fund) pulled back yesterday as the dollar rallied a bit. The chart looks fine as it only filled in an open gap that needed filling, however there are more open gaps below.
BND (bonds / F-fund) also dipped on the higher yields yesterday, but remains in a positive trend while perhaps looking to do some backing and filling of some of its open gaps.
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
Questions, comments, or issues with today's commentary? We can discuss it in the Forum.
Daily Market Commentary Archives
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.
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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Anyone who has been invested in the S-fund this year knows that it has been a long, frustrating road as large cap tech stole the show for most of the year. It may be too early to claim a victory but for right now, the small caps are getting some revenge.
In the past we have seen the S-fund make some extreme parabolic moves - so big that it was really tough to catch the entire move as it seemed overly extreme. This current rally is only a fraction of what we have seen over the years when the S-fund gets hot. It would take another 14% move higher to get to the old all time highs of 2021. But you can also see that some of these parabolic rallies can deflate rather quickly once the run is over, so you have to be careful.
So, before I become a complacent bull, there are some issues that history suggests could be a problem. This may sound boring for those who want to hear only the news that produces endorphins in the brain, but you may want to see this.
The 10-year yield was up slightly yesterday but it has been hanging around the recent lows. That's good. The bad news is, the shorter term yields have been falling even faster. That means the 2-yr / 10-yr yield curve is steepening. Again, sounds good, since an inverted yield curve is bad, right?
The problem with yield curve inversions, when shorter term yields are paying more than longer term yields, is that they eventually unwind, and they tend to unwind when the economy is slowing and the Fed has to cut rates to try to keep it from falling into a recession. That's why an inverted yield curve tends to front run a recession by many months or even years.
You can see here that the yield curve has been steepening in recent weeks. We've seen these before in small spurts, and the S&P 500 either stalled or fell almost every time it happened.
Here is a longer term chart of the yield curve from 1999 to 2023 and again, once an inverted yield curve steepens and "un-inverts", the S&P 500 has experienced some rough times. And it has only inverted three times since the turn of the century. It came just short in 2019, not so coincidentally just before the COVID crash and recession.
OK, back to the bull market. Let's enjoy it while we can, but don't get too comfortable or complacent.
The S&P 500 (C-fund) continues to grind higher and is still overbought, but it is actually trying to consolidate a little over the last week, at least in relation to the move in the small caps.
DWCPF (S-fund) has had a parabolic move but we have seen these kind of rallies in small caps in the past that lasted a lot longer; longer than seems reasonable or sustainable. Is this a "HODL" situation, as the crypto people call it?
The EFA (I-fund) pulled back yesterday as the dollar rallied a bit. The chart looks fine as it only filled in an open gap that needed filling, however there are more open gaps below.
BND (bonds / F-fund) also dipped on the higher yields yesterday, but remains in a positive trend while perhaps looking to do some backing and filling of some of its open gaps.
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
Questions, comments, or issues with today's commentary? We can discuss it in the Forum.
Daily Market Commentary Archives
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.
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.
