Fed Chair Powell's comments yesterday raised some concerns about interest rates, and the stock market, which is need of a pause, is doing just that. Stocks pulled back moderately as the charts see some backing and filling from over overbought levels. The S-fund rallied the most since the election, and now it is pulling back the most. Interestingly it was the I-fund, which has been losing ground in November, that held up best yesterday as perhaps investors were looking for bargains.
The PPI report (Producer Prices Index) was inline with estimates, reiterating the CPI report which showed that inflation is a little sticky, but not bad. Stocks may have been looking for a reason to pause so this, along with the Fed's comments about being data dependent and not being in a rush to continue cutting interest rates, triggered some profit taking.
Meanwhile the data and the Fed comments moved the probability of a 0.25% rate cut in December from 82% on Wednesday, down to 62% yesterday. So, the odds still favor a cut, but it is no longer a done deal.
The chart of the price of oil looks awful and probably on the brink of a breakdown from that head and shoulders pattern. I don't think we'll complain about lower oil and gas prices, but is it telling us anything about the economy, or is this the result of Trump's different energy policies and not a result lower demand, but potentially higher supplies?
Why? Because the 10-year Treasury Yield is not confirming the weakness in oil. Typically the 10-year yield moves in tandem with the price of oil as they both react to economic conditions. Strong demand for oil tends to indicate a stronger economy, as does a rising yield. This chart shows that was the case until about mid-2022 when inflation was heating up and interest rates had to be raised to curb the inflation, and that caused the demand for oil to slip a bit as consumers dealt with higher inflation.
Bottom line, I think oil prices will come down, based on the head and shoulders pattern in the chart, which means more money in consumers' pockets and that could be inflationary and that may be another reason why yields are staying stubbornly high, and deviating from the price of oil, while the Fed is busy cutting interest rates
It's an interesting situation and I'm not so sure how this resolves itself. On top of all of the expected tax cuts that have been promised, it could be a situation where economic growth has to try to outpace potentially higher inflation. And if that is the case, the Fed may be looking to stop cutting interest rates.
I say that without any opinion or judgment because it is kind of a new situation which, combined with the AI driven economic growth, I just don't know how it will play out, but I believe the stock market will continue to rally on this into the end of the year, after perhaps a brief pause as we are seeing now.
The S&P 500 (C-fund) continues its consolidation from the top of the trading channel. The first open gap is now nearly filled. The Fed's comments yesterday could be changing the market outlook, but I still think that open gap below 5800 will not get filled this year. If it does, it will be because of something we haven't heard about yet because, barring that kind of event, the market has too many bullish catalysts and too much support between the current level and 5850, to decline that far. Now, let's just hope the news stays quiet for the next week or so during this pullback (or dip.)
The DWCPF (S-fund) is pulling back sharply as the high beta small caps continue to swing in wide ranges, but so far the pullback has been modest compared to the gains that took it to the new highs. Remember, that 2400 level was the prior high in 2021 so this is a typical double top pullback so far.
ACWX (I-fund) could not quite close in positive territory yesterday after a nice morning rally, but the 200-day EMA and the bottom of the descending channel are trying to hold as support. The I-fund may actually show a gain since a lot of the losses here came after the overseas markets had already closed. We'll see. You can see the updated TSP prices and returns posted by about 9:15 PM ET daily here: https://www.tsptalk.com/tsp_share_prices.php
BND (bonds / F-fund) was flat as yields remained sticky to the upside, along with the inflation data. This is a strong trend and I would not try to fight it until this chart breaks above some resistance.
Thanks so much for reading! Have a great weekend!
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
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The PPI report (Producer Prices Index) was inline with estimates, reiterating the CPI report which showed that inflation is a little sticky, but not bad. Stocks may have been looking for a reason to pause so this, along with the Fed's comments about being data dependent and not being in a rush to continue cutting interest rates, triggered some profit taking.
Meanwhile the data and the Fed comments moved the probability of a 0.25% rate cut in December from 82% on Wednesday, down to 62% yesterday. So, the odds still favor a cut, but it is no longer a done deal.
The chart of the price of oil looks awful and probably on the brink of a breakdown from that head and shoulders pattern. I don't think we'll complain about lower oil and gas prices, but is it telling us anything about the economy, or is this the result of Trump's different energy policies and not a result lower demand, but potentially higher supplies?
Why? Because the 10-year Treasury Yield is not confirming the weakness in oil. Typically the 10-year yield moves in tandem with the price of oil as they both react to economic conditions. Strong demand for oil tends to indicate a stronger economy, as does a rising yield. This chart shows that was the case until about mid-2022 when inflation was heating up and interest rates had to be raised to curb the inflation, and that caused the demand for oil to slip a bit as consumers dealt with higher inflation.
Bottom line, I think oil prices will come down, based on the head and shoulders pattern in the chart, which means more money in consumers' pockets and that could be inflationary and that may be another reason why yields are staying stubbornly high, and deviating from the price of oil, while the Fed is busy cutting interest rates
It's an interesting situation and I'm not so sure how this resolves itself. On top of all of the expected tax cuts that have been promised, it could be a situation where economic growth has to try to outpace potentially higher inflation. And if that is the case, the Fed may be looking to stop cutting interest rates.
I say that without any opinion or judgment because it is kind of a new situation which, combined with the AI driven economic growth, I just don't know how it will play out, but I believe the stock market will continue to rally on this into the end of the year, after perhaps a brief pause as we are seeing now.
The S&P 500 (C-fund) continues its consolidation from the top of the trading channel. The first open gap is now nearly filled. The Fed's comments yesterday could be changing the market outlook, but I still think that open gap below 5800 will not get filled this year. If it does, it will be because of something we haven't heard about yet because, barring that kind of event, the market has too many bullish catalysts and too much support between the current level and 5850, to decline that far. Now, let's just hope the news stays quiet for the next week or so during this pullback (or dip.)
The DWCPF (S-fund) is pulling back sharply as the high beta small caps continue to swing in wide ranges, but so far the pullback has been modest compared to the gains that took it to the new highs. Remember, that 2400 level was the prior high in 2021 so this is a typical double top pullback so far.
ACWX (I-fund) could not quite close in positive territory yesterday after a nice morning rally, but the 200-day EMA and the bottom of the descending channel are trying to hold as support. The I-fund may actually show a gain since a lot of the losses here came after the overseas markets had already closed. We'll see. You can see the updated TSP prices and returns posted by about 9:15 PM ET daily here: https://www.tsptalk.com/tsp_share_prices.php
BND (bonds / F-fund) was flat as yields remained sticky to the upside, along with the inflation data. This is a strong trend and I would not try to fight it until this chart breaks above some resistance.
Thanks so much for reading! Have a great weekend!
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.
