The action wasn't that great in the stock market yesterday, especially for small caps which had a nasty negative reversal day, but things had gotten fairly hot after the election, and we were probably due to see some kind of pause. My thoughts are that dips will be bought rather quickly, so I welcome some weakness in the short-term, not only because I have recently raised some cash, but to give the extended charts more stability and build support for the stretch run into the end of the year.
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We got the inflation report CPI (Consumer Prices Index) data yesterday and, from Briefing.com:
"CPI increased 0.2% month-over-month in October (Briefing.com consensus 0.2%) while core CPI, which excludes food and energy, increased 0.3% month-over-month (Briefing.com consensus 0.3%).
"Those increases left total CPI up 2.6% year-over-year, versus 2.4% in September, and core CPI up 3.3%, unchanged from September."
That little tick up in the year over year increase comes at an interesting spot - basically the top of the comfortable 16 year range (that I have drawn in red.) If the top of that comfy range holds, inflation could become a problem again. That seems to be the consensus for the coming years as expectations for the Trump administration are for lower taxes and pro-growth policies, which sounds good, but it could fuel inflation.
We'll get another look at inflation data with this morning's PPI report (Producer Prices Index), and then we'll see Retail Sales data on Friday.
The 10-year Treasury Yield was down in early trading yesterday, but look what happened to the small caps of the S-fund when yields started to rebound from the morning lows. This is a 2-minute, one day chart of each.
The dollar is also getting into a parabolic mode. Look at that rally since the start of October.
This is why the dollar matters so much when considering investing in the I-fund. That small red box on the right is what has happened to the I-fund since that rally in the dollar started several weeks ago. Meanwhile US stocks were making new highs recently. This chart may be at some support now as it tests the 200-day EMA, but the bottom of that red channel is a long way down if it has designs on testing that. It's a matter of how far the dollar can go before some kind of meaningful pullback.
The rally in stocks, the risks of inflation, and stable employment data may slow down the interest rate cuts from the Fed, but there is still an 80% chance of a 0.25% rate cut at the next FOMC meeting in December.
The S&P 500 (C-fund) continues to stall at the top of the trading channel, which is just fine, and even a little pullback to fill in that first gap would be welcomed, even by the bulls. If I had to guess, barring any major negative headlines, I think a good place for this to pullback to land would be where the confluence of support meets at the middle red rising trend line, the top of that large open gap, the 20-day EMA, and the prior peak - all near 5860 or so.
The DWCPF (S-fund) is also quite stretched after the recent breakout, and it has filled in one small open gap this week, but there's a long way down before that second one gets filled. Support near 2300 may stop that gap from getting filled anytime soon.
BND (bonds / F-fund) was down slightly as it remains mired in a pullback, yet it has been holding near that 72.50 area for quite a while. The trend is down but the downside momentum has eased. Resistance looks stubborn, however.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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