Stocks came roaring back on Turnaround Tuesday after a favorable CPI report came mostly inline with estimates - maybe a little hot. Another 2-3 day pullback ended for the S&P 500 as the dip buyers did their thing. Small caps lagged as yields moved up because of the slight beat on inflation data. The move higher in yields meant the bond market and F-fund declined on the day.
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Getting past the CPI felt like a relief reaction as investors seemed a little nervous heading into Tuesday's report. The numbers tell us that the economy is growing, and that inflation is getting better, but it still isn't great. Inflation is just relatively better than it was the prior two Februarys, which of course were terrible. The Fed has typically targeted inflation at 2% and not only are we still seeing year over year inflation above 3%, but that 3% is 3% above the February 2023 number, not back to "normal" inflation. And the 7% inflation in Feb 2023 was 7% above Feb 2022's 7% gain. 3.2% is still higher than any reading over the last 12 years prior to the spike caused by the COVID stimulus spending.
As an illustration, in order for prices to actually go down, we would need to see negative CPI numbers like we saw in 2008 and 2009. Flat, or 0% CPI would only mean prices stayed the same as the high prices we saw in 2022 and 2023.
The reason this is important is because the market is obsessed with interest rates and the Fed obviously knows the situation, and cutting interest rates means potentially seeing prices go up again. Do they really want to risk that when they are still going up over 3% a year? I believe we will get two more CPI reports before the next FOMC meeting, so perhaps things will improve in the interim.
Like everyone else, I want interest rates to go down for cheaper borrowing purposes and most likely higher stock prices, but prices of everyday items will go up in the process, and if the Fed is going to cut rates, I think I'd rather see inflation under 2% first, but I'm no economist so what do I know?
The 10-year Treasury rallied on the stronger than expected data. It moved back above the 200-day EMA but stalled at the 50-day EMA on the first test. If that means that the 10-year is going to hold above 4% then again it means the economy is growing, but can the Fed cut rates if the 10-year starts moving into toward 4.3% area again?
The dollar was up early but it lost steam quickly yesterday and reversed off the highs to close just slightly positive.
The EFA (I-fund) was happy with that as early losses in the EFA turned into solid gains by the close, keeping the I-fund hot. Two open gaps in the area were filled so the only open gaps now are down below, making a pullback still possible. The last two pullbacks only tested the tops of those open gaps (red arrows.) A pullback wouldn't be terrible at this point because, while very bullish looking, the chart is getting a little extended and a retest of the blue breakout line is a possibility.
A long term look at the weekly chart of the S&P 500 shows how extended it has become in the short term. It's only abut 8% above the January 2022 high so the two year return isn't very extreme, but as I show in the chart, it is quite common for a breakout to come back and retest the breakout area before the next leg up resumes.
It breakouts, runs up, pulls back to the breakout line or maybe a little lower, then makes another new high -- eventually. So even a move back to 4750 would be considered normal bull market action.
When that happens is anyone's guess, but each new high means the pullback, whenever it comes, would get more extreme.
The S&P 500 (C-fund) had a great day and a 7% snap-back rally in Nvidia yesterday was a key catalyst. Big tech led the way and that, and the rally in yields, is why the S&P 500 was back outperforming the small caps on the way up. I am still concerned that last Friday's severe negative reversal day could have been a major turning point and the snap back rally is just a test of that peak. Time will tell, but that's what significant outside reversal days can do.
The DWCPF (S-fund) was up modestly, lagging the large caps, so it is still well below Friday's highs and like the S&P 500 chart, I am concerned right now that we should not ignore that reversal pattern. Whether to sell this fund is another story, but it is a warning and we may not want to take our eye off the ball too long while its attempting to test last week's high.
BND (Bonds / F-fund) pulled back sharply after yields spiked on the CPI data. Like the stock funds, BND had rallied quite a bit off the February low and some backing and filling is not surprising at this point.
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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[TD="width: 338, align: center"] Daily TSP Funds Return
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Getting past the CPI felt like a relief reaction as investors seemed a little nervous heading into Tuesday's report. The numbers tell us that the economy is growing, and that inflation is getting better, but it still isn't great. Inflation is just relatively better than it was the prior two Februarys, which of course were terrible. The Fed has typically targeted inflation at 2% and not only are we still seeing year over year inflation above 3%, but that 3% is 3% above the February 2023 number, not back to "normal" inflation. And the 7% inflation in Feb 2023 was 7% above Feb 2022's 7% gain. 3.2% is still higher than any reading over the last 12 years prior to the spike caused by the COVID stimulus spending.
As an illustration, in order for prices to actually go down, we would need to see negative CPI numbers like we saw in 2008 and 2009. Flat, or 0% CPI would only mean prices stayed the same as the high prices we saw in 2022 and 2023.
The reason this is important is because the market is obsessed with interest rates and the Fed obviously knows the situation, and cutting interest rates means potentially seeing prices go up again. Do they really want to risk that when they are still going up over 3% a year? I believe we will get two more CPI reports before the next FOMC meeting, so perhaps things will improve in the interim.
Like everyone else, I want interest rates to go down for cheaper borrowing purposes and most likely higher stock prices, but prices of everyday items will go up in the process, and if the Fed is going to cut rates, I think I'd rather see inflation under 2% first, but I'm no economist so what do I know?
The 10-year Treasury rallied on the stronger than expected data. It moved back above the 200-day EMA but stalled at the 50-day EMA on the first test. If that means that the 10-year is going to hold above 4% then again it means the economy is growing, but can the Fed cut rates if the 10-year starts moving into toward 4.3% area again?
The dollar was up early but it lost steam quickly yesterday and reversed off the highs to close just slightly positive.
The EFA (I-fund) was happy with that as early losses in the EFA turned into solid gains by the close, keeping the I-fund hot. Two open gaps in the area were filled so the only open gaps now are down below, making a pullback still possible. The last two pullbacks only tested the tops of those open gaps (red arrows.) A pullback wouldn't be terrible at this point because, while very bullish looking, the chart is getting a little extended and a retest of the blue breakout line is a possibility.
A long term look at the weekly chart of the S&P 500 shows how extended it has become in the short term. It's only abut 8% above the January 2022 high so the two year return isn't very extreme, but as I show in the chart, it is quite common for a breakout to come back and retest the breakout area before the next leg up resumes.
It breakouts, runs up, pulls back to the breakout line or maybe a little lower, then makes another new high -- eventually. So even a move back to 4750 would be considered normal bull market action.
When that happens is anyone's guess, but each new high means the pullback, whenever it comes, would get more extreme.
The S&P 500 (C-fund) had a great day and a 7% snap-back rally in Nvidia yesterday was a key catalyst. Big tech led the way and that, and the rally in yields, is why the S&P 500 was back outperforming the small caps on the way up. I am still concerned that last Friday's severe negative reversal day could have been a major turning point and the snap back rally is just a test of that peak. Time will tell, but that's what significant outside reversal days can do.
The DWCPF (S-fund) was up modestly, lagging the large caps, so it is still well below Friday's highs and like the S&P 500 chart, I am concerned right now that we should not ignore that reversal pattern. Whether to sell this fund is another story, but it is a warning and we may not want to take our eye off the ball too long while its attempting to test last week's high.
BND (Bonds / F-fund) pulled back sharply after yields spiked on the CPI data. Like the stock funds, BND had rallied quite a bit off the February low and some backing and filling is not surprising at this point.
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.
