Wednesday saw what we might consider a post-holiday reversal, and I'll get into that a little more below, but suffice it to say, stocks pulled back modestly after last week's pre-holiday rally. We did see some buying after the initial opening decline, so the bulls are not dead by any means, but with the S&P 500 gaining about 17% in the first half of the year, perhaps it won't be so easy in the second half. The dollar was up making the I-fund the laggard, and a pop higher in yields gave the F-fund a black eye on the day.
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This is pure speculation and just trying to understand or justify the recent action. Stocks started to pull back on June 16 and we saw a pretty sharp 6-day decline, that is until last week, a pre-holiday week. I often talk about those holiday reversal setups and perhaps last week was just one of these reversal that tend to get us leaning the wrong way? Yesterday was the first day after the holiday weekend and we saw a modest dip.
It's probably too early to say that is exactly what yesterday was, but at this point it is part of the speculation process. Will the June pullback resume, or will the positive holiday bias keep the bulls around?
Yesterday longer-term yields moved higher as the market is either getting more serious about the Fed's potential interest rate hike later this month, or they think economic data has been strong enough to justify higher yields. The rally in yields has been bad for bonds and the F-fund but historically it could be signaling trouble for stocks although more recently yields and the S&P 500 have been moving up together. The question being asked now is if the 10-year yield does eclipse 4% again, can stocks remain in rally mode? You can see below that prior times the yield was flirting with 4%, the S&P 500 struggled going forward, and did better when the yield was falling back down.
As for the stock market, which has mostly been led by big cap tech, the question is if the broader market can continue to rally if we do see a meaningful, perhaps overdue, correction in some of big tech names that have pushed the S&P 500 and Nasdaq to big gains this year? Looking at some of the FAANG / MAGA stocks, we can see gains of nearly 50% to almost 200% this year alone for these behemoths in the first six months of the year.
Meanwhile the broader indices like the S-fund's DWCPF, or even the Equal Weighted S&P 500 (all 500 stocks weighted equally) are up 6 to 12%. That's nothing to sneeze at for a 6 month gain, but what happens if those big names rollover, which seems a reasonable expectation given the inverted yield curve, plus rising interest rates, and a declining Fed balance sheet?
We will get the June Jobs Report on Friday and estimates are looking for a gain of about 220,000 jobs and an unemployment rate of 3.6%. We will also get a CPI report next week, all fodder for the Fed at their next FOMC meeting at the end of the month where they are expected to raise interest rates again by 0.25%.
The S&P 500 (C-fund) is in an uptrend and nearing the rising resistance line overhead. I don't see too much trouble here except that even a move to the bottom of the rising channel would be a sharp loss, so the risk / reward seems to be getting more risky, but momentum is tough to stop. There's a big open gap near 4400 and a fill may be in the cards if the bears haven't completely hibernated this week. Perhaps the volatility after the jobs report will get that done?
DWCPF (S-fund) pulled back sharply yesterday and it did fill its gap from the other day - the one that is still open on the S&P 500 chart above. This looks pretty good unless we go with the theory that last week was a pre-holiday reversal of the pullback that started on June 16. In other words, will the June 16 - June 23 pullback resume now that the holiday is behind us?
EFA (I-fund) lagged after another big rally in the dollar. It opened yet another overhead gap, which is the nature of the trading from the overseas markets during US market times. It's trying to hold the 50-day EMA and there is other support below if that fails. The chart of the dollar is looking better which would be a headwind here.
BND (bonds / F-fund) broke down on Wednesday as it nears the 200-day simple average again, which held in May, but below that is a large looming open gap down to 71.25. The longer-term chart shows a breakdown with not much support below, so it is make or break time for bonds.
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
Market Commentary Archives
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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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This is pure speculation and just trying to understand or justify the recent action. Stocks started to pull back on June 16 and we saw a pretty sharp 6-day decline, that is until last week, a pre-holiday week. I often talk about those holiday reversal setups and perhaps last week was just one of these reversal that tend to get us leaning the wrong way? Yesterday was the first day after the holiday weekend and we saw a modest dip.
It's probably too early to say that is exactly what yesterday was, but at this point it is part of the speculation process. Will the June pullback resume, or will the positive holiday bias keep the bulls around?
Yesterday longer-term yields moved higher as the market is either getting more serious about the Fed's potential interest rate hike later this month, or they think economic data has been strong enough to justify higher yields. The rally in yields has been bad for bonds and the F-fund but historically it could be signaling trouble for stocks although more recently yields and the S&P 500 have been moving up together. The question being asked now is if the 10-year yield does eclipse 4% again, can stocks remain in rally mode? You can see below that prior times the yield was flirting with 4%, the S&P 500 struggled going forward, and did better when the yield was falling back down.
As for the stock market, which has mostly been led by big cap tech, the question is if the broader market can continue to rally if we do see a meaningful, perhaps overdue, correction in some of big tech names that have pushed the S&P 500 and Nasdaq to big gains this year? Looking at some of the FAANG / MAGA stocks, we can see gains of nearly 50% to almost 200% this year alone for these behemoths in the first six months of the year.
Meanwhile the broader indices like the S-fund's DWCPF, or even the Equal Weighted S&P 500 (all 500 stocks weighted equally) are up 6 to 12%. That's nothing to sneeze at for a 6 month gain, but what happens if those big names rollover, which seems a reasonable expectation given the inverted yield curve, plus rising interest rates, and a declining Fed balance sheet?
We will get the June Jobs Report on Friday and estimates are looking for a gain of about 220,000 jobs and an unemployment rate of 3.6%. We will also get a CPI report next week, all fodder for the Fed at their next FOMC meeting at the end of the month where they are expected to raise interest rates again by 0.25%.
The S&P 500 (C-fund) is in an uptrend and nearing the rising resistance line overhead. I don't see too much trouble here except that even a move to the bottom of the rising channel would be a sharp loss, so the risk / reward seems to be getting more risky, but momentum is tough to stop. There's a big open gap near 4400 and a fill may be in the cards if the bears haven't completely hibernated this week. Perhaps the volatility after the jobs report will get that done?
DWCPF (S-fund) pulled back sharply yesterday and it did fill its gap from the other day - the one that is still open on the S&P 500 chart above. This looks pretty good unless we go with the theory that last week was a pre-holiday reversal of the pullback that started on June 16. In other words, will the June 16 - June 23 pullback resume now that the holiday is behind us?
EFA (I-fund) lagged after another big rally in the dollar. It opened yet another overhead gap, which is the nature of the trading from the overseas markets during US market times. It's trying to hold the 50-day EMA and there is other support below if that fails. The chart of the dollar is looking better which would be a headwind here.
BND (bonds / F-fund) broke down on Wednesday as it nears the 200-day simple average again, which held in May, but below that is a large looming open gap down to 71.25. The longer-term chart shows a breakdown with not much support below, so it is make or break time for bonds.
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
Market Commentary Archives
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.
