The stock market continued its rally off the lows on Friday as the S&P 500 and Nasdaq made it seven straight positive closes. What a difference a couple of weeks can make as the economic data turned things around with stronger labor and retail data, while keeping inflation in check. The stocks market is trading as if there is no chance of a recession, so why is the bond market saying otherwise?
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I wish I had the answer to that because it is an intriguing question. We'll look at that in a second, but first, this is too good to ignore, even if it is most likely meaningless. But is it coincidence or is someone / something playing games? Friday was the sixth straight close for the S&P 500 where the price only had 3's, 4's or 5's in it. Understandably, with the S&P trading in the 5300 - 5500 area now, it has more of a chance of this happening, but the tens and ones have also been 3, 4, or 5 coming in at 44, 44, 34, 55, 43, and 54 on Friday. What are the odds there is not one 0, 1, 2, 6, 7, or 8 in there for six straight days?
OK, back to reality. Yields slid lower again on Friday, making it 5 of the last 6 days that the 10-year Treasury yields was down, but the one day it was up, it was up sharply. It is trying to work on a higher low, but that wouldn't be official unless it can get back above that 4.02% area.
The Federal Reserve has a tendency to follow the bond market - in particular the 2-year Treasury Yield. The bond market and bond traders are considered a more savvy than than the stock market and stock traders, and believe it or not, the bond market is a much bigger market than the stock market. So while Jerome Powell and company decided not to raise interest rates at their July 31 meeting, the 2-year T-note yield has been trying to tell them that maybe it is time come down, rather than waiting until the next FOMC meeting, which is not until September 17 - 18. The Fed Funds rate is still 1.25%, or five 0.25% rate cuts, above the 2-year yield, and 1.5% or six 0.25% rate cuts above the 10-year yield, if that makes sense, so they are lagging the bond market substantially.
We have almost 5 weeks before their next non-emergency chance to cut rates. The question is, has the recent strong economic data proven that them correct in holding off on cutting, or did they miss the chance, like they did a few years ago by underestimating inflation, and allow higher rates to continue to put pressure on the economy and GDP growth?
I mentioned last week that the Atlanta Fed cut their Q3 GDP estimate from 2.9% to 2.4% on August 15th. Guess what? The next day, August 16, they cut it again to 2.0%, so maybe a rate cut would have been more helpful in July, although 2% growth is still not a recession, and the stock market has been pricing in no recession in the last couple of weeks.
There are certainly signs that the economy has dodged a recession, but there are a few things like the price of oil and copper trending lower - two commodities that are very sensitive to economic conditions, that may be trying to tell us something. Oil may be looking to test the recent lows again...
... and copper did bounce off the recent lows, but it is just barely coming off them and that bounce has a lot of overhead resistance to deal with this week.
The Transportation Index is also a good indication of economic conditions. It is trading in the middle of this year's wide trading channel, but the Index is actually still negative for the year, so it is lagging the general market indices by quite a bit. Does this tell us anything or is it just the way it is right now?
It's a slow week for economic data so there are no sharks circling in the water to shake things up for the stock market, but we will get the Jackson Hole Symposium where Jerome Powell and other economists will be speaking, but that's not until Friday and if I had to speculate, I'd say Powell will use this to justify his policy on being patient with rate cuts. Since the prior FOMC meeting, the economic data has been good, except for the July jobs report that came out, but Powell does have a case if the weekly jobless claims numbers continue to show no concerns in the jobs market.
The S&P 500 (C-fund) completed a full week of gains on Friday, making it seven straight positive closes. Wednesday gave it a big gap up opening, and it remains open so it becomes an obvious pullback target, and the bulls have to look over their shoulder for a while wondering if it is going to get filled. The rally has now completely retraced the August 1st breakdown candlestick, so the bears do have some ammunition if they're looking for a reason to finally step in near that peak. The bulls have the momentum and there is little on the calendar until Friday, so they may have the advantage if the bears don't act on that resistance.
The DWCPF (S-fund) just filled in that August 2nd gap and tagged the May peak resistance again. It also has an open gap down by 2030. It looks strong but this could be a place for a pause in the rally, although retracing that bearish reversal August 1st candlestick up to 2140 is also very possible.
The EFA (I-fund) has catapulted off the lows for the same reason that the US fund have, but also the bearish activity in the dollar has helped create an even more dramatic "V" bottom look. Has it come too far, too fast, or are new highs next? Place your bets!
BND (F-fund) has been chopping around for a few days, backing and filling open gaps above and below. It is above resistance, which could now act as support, but it may need to hurry up and test the prior highs, otherwise we could be seeing a bear flag developing. Why bonds would go down (yields up) heading into the September rate cut, I don't know, unless the cuts are already priced in too much.
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.
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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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I wish I had the answer to that because it is an intriguing question. We'll look at that in a second, but first, this is too good to ignore, even if it is most likely meaningless. But is it coincidence or is someone / something playing games? Friday was the sixth straight close for the S&P 500 where the price only had 3's, 4's or 5's in it. Understandably, with the S&P trading in the 5300 - 5500 area now, it has more of a chance of this happening, but the tens and ones have also been 3, 4, or 5 coming in at 44, 44, 34, 55, 43, and 54 on Friday. What are the odds there is not one 0, 1, 2, 6, 7, or 8 in there for six straight days?
OK, back to reality. Yields slid lower again on Friday, making it 5 of the last 6 days that the 10-year Treasury yields was down, but the one day it was up, it was up sharply. It is trying to work on a higher low, but that wouldn't be official unless it can get back above that 4.02% area.
The Federal Reserve has a tendency to follow the bond market - in particular the 2-year Treasury Yield. The bond market and bond traders are considered a more savvy than than the stock market and stock traders, and believe it or not, the bond market is a much bigger market than the stock market. So while Jerome Powell and company decided not to raise interest rates at their July 31 meeting, the 2-year T-note yield has been trying to tell them that maybe it is time come down, rather than waiting until the next FOMC meeting, which is not until September 17 - 18. The Fed Funds rate is still 1.25%, or five 0.25% rate cuts, above the 2-year yield, and 1.5% or six 0.25% rate cuts above the 10-year yield, if that makes sense, so they are lagging the bond market substantially.
We have almost 5 weeks before their next non-emergency chance to cut rates. The question is, has the recent strong economic data proven that them correct in holding off on cutting, or did they miss the chance, like they did a few years ago by underestimating inflation, and allow higher rates to continue to put pressure on the economy and GDP growth?
I mentioned last week that the Atlanta Fed cut their Q3 GDP estimate from 2.9% to 2.4% on August 15th. Guess what? The next day, August 16, they cut it again to 2.0%, so maybe a rate cut would have been more helpful in July, although 2% growth is still not a recession, and the stock market has been pricing in no recession in the last couple of weeks.
There are certainly signs that the economy has dodged a recession, but there are a few things like the price of oil and copper trending lower - two commodities that are very sensitive to economic conditions, that may be trying to tell us something. Oil may be looking to test the recent lows again...
... and copper did bounce off the recent lows, but it is just barely coming off them and that bounce has a lot of overhead resistance to deal with this week.
The Transportation Index is also a good indication of economic conditions. It is trading in the middle of this year's wide trading channel, but the Index is actually still negative for the year, so it is lagging the general market indices by quite a bit. Does this tell us anything or is it just the way it is right now?
It's a slow week for economic data so there are no sharks circling in the water to shake things up for the stock market, but we will get the Jackson Hole Symposium where Jerome Powell and other economists will be speaking, but that's not until Friday and if I had to speculate, I'd say Powell will use this to justify his policy on being patient with rate cuts. Since the prior FOMC meeting, the economic data has been good, except for the July jobs report that came out, but Powell does have a case if the weekly jobless claims numbers continue to show no concerns in the jobs market.
The S&P 500 (C-fund) completed a full week of gains on Friday, making it seven straight positive closes. Wednesday gave it a big gap up opening, and it remains open so it becomes an obvious pullback target, and the bulls have to look over their shoulder for a while wondering if it is going to get filled. The rally has now completely retraced the August 1st breakdown candlestick, so the bears do have some ammunition if they're looking for a reason to finally step in near that peak. The bulls have the momentum and there is little on the calendar until Friday, so they may have the advantage if the bears don't act on that resistance.
The DWCPF (S-fund) just filled in that August 2nd gap and tagged the May peak resistance again. It also has an open gap down by 2030. It looks strong but this could be a place for a pause in the rally, although retracing that bearish reversal August 1st candlestick up to 2140 is also very possible.
The EFA (I-fund) has catapulted off the lows for the same reason that the US fund have, but also the bearish activity in the dollar has helped create an even more dramatic "V" bottom look. Has it come too far, too fast, or are new highs next? Place your bets!
BND (F-fund) has been chopping around for a few days, backing and filling open gaps above and below. It is above resistance, which could now act as support, but it may need to hurry up and test the prior highs, otherwise we could be seeing a bear flag developing. Why bonds would go down (yields up) heading into the September rate cut, I don't know, unless the cuts are already priced in too much.
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.
