Stocks were down again on Friday but they had gotten very oversold in the short-term and they did find some traction in the latter half of the day to close well off their lows. Still, the week ended with losses near 5% for the C and S funds, while the I-fund lost 3%. Volume was sharply higher, but that's typical of a quadruple expiration Friday, and was not a capitulation. Bonds were down as well as yields remained near the 2022 highs.
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Oil was down 0.4% and that trend also remains down and may be the main reason that stocks haven't fallen to the June lows yet.
Speaking of June, prior to this past Friday, the last quadruple witching expiration day was in mid-June and that happened to mark the low for the market before a two month rally. Can Friday's high volume expiration day trigger the same kind of reaction? I don't view these volume spikes as a capitulation low, but we can't argue that it didn't work in June.
Mid-September isn't very good for stocks historically, but then again last week actually had a favorable seasonal history and that didn't work out so well.
Chart provided courtesy of www.sentimentrader.com
The yield on the 10-year Treasury has been bumping up against the June highs and a typical reaction would be to see it pull back, at least temporarily. Whether this breaks out to new highs or not may determine if we see a relief rally in stocks early this week, or not. The chances of a rally would be greater if we do see a pullback here in the 10-year.
The above chart is the 2-year Treasury Yield and perhaps this is a sign that yields won't pullback on the 10-year? That breakout to new highs in the 2-year kept the 2/10 yield curve inverted, and this type of action has historically preceded a recession.
Despite being just a brief stint on the inverted side in April, it was a warning for the economy. When 2-year yields pay more than the 10-year, the bond market is telling us that something isn't right. Then in July there were no subtleties. The yield curve inverted again, and it has remained inverted since.
Let's take a look back 30+ years at prior 2/10 yield curve inversions and what it did to the S&P 500. Timing-wise it wasn't always the same, but the stock market eventually reacted to the bond market warning as the economy weakened to the point of recession in most cases.
In 1998 it was the Russia currency issues and the collapse of the Long-Term Capital Management Hedge fund.
In 2000 we saw the start of the bursting of the dot com bubble.
In 2006 the yield curve inverted and remained inverted into mid-2007. The market peaked in late 2007 and of course the financial crisis bore down on the economy in 2008 and we saw a harsh bear market.
In 2020 we had the covid crash about 6-months after the yield curve inverted in the fall of 2019.
And, as I mentioned, in April of this year we had the first brush with an inversion and then again in July and since then it has been inverted.
Stocks don't necessarily go straight down during bear markets, although the covid inversion and crash was close. Just like in a bull market you get some ups and downs but the trend is positive so investors and traders get used to buying the dips. Right now we're in a bear market and the trend is down and the strategy for non-buy and holders is to sell rallies if not totally in cash already.
As TSP Talk Plus subscribers know, I did a hit and run in the first week or so of the month and locked in a gain but now I'm stuck on the sidelines because of our limitations in the TSP. That kind of ties my hands and I won't be able to take advantage of any other imminent rallies through the end of the month. I'm OK with that since hit and run buys have been my plan in recent months, I stuck to it, and this is a very dangerous market environment and caution is warranted.
The two day FOMC meeting starts tomorrow and then on Wednesday at about 2 PM ET we should hear the Fed's decision on interest rates. After last week's CPI report, the market has been pricing in an 82% chance of a 0.75% rate hike, and an 18% chance of a full 1.0% increase. As always, any divergence from those numbers would shock the market, as well as any new shift in their policy outlook.
This week has the potential for an oversold rebound, but the market environment has a "crash vibe" going on as well. That makes for tough analysis. Crashes are very rare so the odds probably favor a bounce, but the devastation a crash can bring, and t'is the season, makes it a tougher risk / reward play.
The S&P 500 (C-fund) gave us the volume spike that we assumed would happen during expiration Friday. Again, not capitulation, but it was effective in June as a buying opportunity which surprised a lot of people by seeing the rally last for two months. There was a positive reversal formation with Friday's strong close, but it did fall below another level of support and the chart may be in some trouble if it can't recapture the 3900 area rather quickly. There is a big open gap up near 4080 that will eventually get filled, but there is also that old open gap down near 3800 that is suddenly very much in play.
The weekly S&P 500 chart created a negative outside reversal weekly candlestick, and the large bear flag is still intact creating an ominous downside target if it breaks down as they tend to do. Of course in the short-term it could also test the top of the flag before it does break down, if it eventually does break.
The DWCPF (S-fund / small caps) lagged on Friday with a loss near 2%. The longer-term chart shows that it is above the descending trading channel, but the 20-day EMA is back below the 50-day EMA. The last time it fell below the 50 EMA was last December, and that didn't turn out very well. There was an attempt to get back above it in April and that didn't work out so well either.
The EFA (I-fund) is testing the 2022 lows this would be test number three at the 60 area. There's a chance that we'll see a relief rally off this support line, but this is looking dangerous, and if 60 fails it could really be in trouble.
BND (bonds / F-fund) is also testing the June lows. Ironically, if the higher yields, which have been troublesome for the stock market, start to fall it would be because of the weakness in the economy. That could bring in some interest in bonds as a safe haven. So, while stocks and bonds have been basically moving in the same direction this year, that could change if we start seeing more signs of a recession developing.
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. 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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Oil was down 0.4% and that trend also remains down and may be the main reason that stocks haven't fallen to the June lows yet.
Speaking of June, prior to this past Friday, the last quadruple witching expiration day was in mid-June and that happened to mark the low for the market before a two month rally. Can Friday's high volume expiration day trigger the same kind of reaction? I don't view these volume spikes as a capitulation low, but we can't argue that it didn't work in June.

Mid-September isn't very good for stocks historically, but then again last week actually had a favorable seasonal history and that didn't work out so well.

Chart provided courtesy of www.sentimentrader.com
The yield on the 10-year Treasury has been bumping up against the June highs and a typical reaction would be to see it pull back, at least temporarily. Whether this breaks out to new highs or not may determine if we see a relief rally in stocks early this week, or not. The chances of a rally would be greater if we do see a pullback here in the 10-year.

The above chart is the 2-year Treasury Yield and perhaps this is a sign that yields won't pullback on the 10-year? That breakout to new highs in the 2-year kept the 2/10 yield curve inverted, and this type of action has historically preceded a recession.
Despite being just a brief stint on the inverted side in April, it was a warning for the economy. When 2-year yields pay more than the 10-year, the bond market is telling us that something isn't right. Then in July there were no subtleties. The yield curve inverted again, and it has remained inverted since.

Let's take a look back 30+ years at prior 2/10 yield curve inversions and what it did to the S&P 500. Timing-wise it wasn't always the same, but the stock market eventually reacted to the bond market warning as the economy weakened to the point of recession in most cases.

In 1998 it was the Russia currency issues and the collapse of the Long-Term Capital Management Hedge fund.
In 2000 we saw the start of the bursting of the dot com bubble.
In 2006 the yield curve inverted and remained inverted into mid-2007. The market peaked in late 2007 and of course the financial crisis bore down on the economy in 2008 and we saw a harsh bear market.
In 2020 we had the covid crash about 6-months after the yield curve inverted in the fall of 2019.
And, as I mentioned, in April of this year we had the first brush with an inversion and then again in July and since then it has been inverted.
Stocks don't necessarily go straight down during bear markets, although the covid inversion and crash was close. Just like in a bull market you get some ups and downs but the trend is positive so investors and traders get used to buying the dips. Right now we're in a bear market and the trend is down and the strategy for non-buy and holders is to sell rallies if not totally in cash already.
As TSP Talk Plus subscribers know, I did a hit and run in the first week or so of the month and locked in a gain but now I'm stuck on the sidelines because of our limitations in the TSP. That kind of ties my hands and I won't be able to take advantage of any other imminent rallies through the end of the month. I'm OK with that since hit and run buys have been my plan in recent months, I stuck to it, and this is a very dangerous market environment and caution is warranted.
The two day FOMC meeting starts tomorrow and then on Wednesday at about 2 PM ET we should hear the Fed's decision on interest rates. After last week's CPI report, the market has been pricing in an 82% chance of a 0.75% rate hike, and an 18% chance of a full 1.0% increase. As always, any divergence from those numbers would shock the market, as well as any new shift in their policy outlook.
This week has the potential for an oversold rebound, but the market environment has a "crash vibe" going on as well. That makes for tough analysis. Crashes are very rare so the odds probably favor a bounce, but the devastation a crash can bring, and t'is the season, makes it a tougher risk / reward play.
The S&P 500 (C-fund) gave us the volume spike that we assumed would happen during expiration Friday. Again, not capitulation, but it was effective in June as a buying opportunity which surprised a lot of people by seeing the rally last for two months. There was a positive reversal formation with Friday's strong close, but it did fall below another level of support and the chart may be in some trouble if it can't recapture the 3900 area rather quickly. There is a big open gap up near 4080 that will eventually get filled, but there is also that old open gap down near 3800 that is suddenly very much in play.

The weekly S&P 500 chart created a negative outside reversal weekly candlestick, and the large bear flag is still intact creating an ominous downside target if it breaks down as they tend to do. Of course in the short-term it could also test the top of the flag before it does break down, if it eventually does break.

The DWCPF (S-fund / small caps) lagged on Friday with a loss near 2%. The longer-term chart shows that it is above the descending trading channel, but the 20-day EMA is back below the 50-day EMA. The last time it fell below the 50 EMA was last December, and that didn't turn out very well. There was an attempt to get back above it in April and that didn't work out so well either.

The EFA (I-fund) is testing the 2022 lows this would be test number three at the 60 area. There's a chance that we'll see a relief rally off this support line, but this is looking dangerous, and if 60 fails it could really be in trouble.

BND (bonds / F-fund) is also testing the June lows. Ironically, if the higher yields, which have been troublesome for the stock market, start to fall it would be because of the weakness in the economy. That could bring in some interest in bonds as a safe haven. So, while stocks and bonds have been basically moving in the same direction this year, that could change if we start seeing more signs of a recession developing.

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. 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.