Stocks remain volatile as Wednesday's big gains were quickly erased after another very inflationary CPI report. Yields spiked, the Fed grumbled, and the stock market buckled under the pressure. Technically there wasn't a whole lot of damage done to the charts, but the bulls have given up momentum and they will have to fight the bears, who got quite aggressive again yesterday, to see who controls the ball. The Dow lost 526-points, the Nasdaq was the biggest loser, and small caps held onto some of Wednesday's gains. The dollar was all over the place yesterday, up big, down big, before closing slightly higher.
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It was a very painful day for the bulls but the bull flag on the chart of the S&P 500 (C-fund) is still intact. The gap that was opened on Wednesday is filled already and it took that monster reversal to do it. It's that negative reversal day however, that can switch momentum, and the bulls would have to react right away or risk a breakdown. A test of the January lows wouldn't be the worst thing in the world to happen to stocks. It could cement in a low, but there's no guarantees it would hold so the bulls would probably prefer to avoid that.
The DWCPF (small caps / S-fund) also saw a big gain disappear, although at least this one did not give back all of Wednesday losses. Not yet, anyway. The 50-day EMA has been tough resistance, which tends to be the case in a bear market. That 2000 area really needs to hold on the downside as it looks like a possible bear flag or rising wedge formation.
The EFA (I-fund) is the same - trading between moving averages with the 200-day EMA being important support after breaking above it the prior day.
BND (Bonds / F-fund) is ugly and it keeps getting uglier. Again, stretched to the downside and due for a relief rally, but why bother?
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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Thanks for reading. Have a great weekend!
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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Yesterday we were asking about volatility and what the CPI report can do to the VIX and the market, and we got an answer.
From Thursday's commentary:
"This morning we will get a key inflationary economic report in the CPI. This one has been a market mover of late, so is the market ready for another jolt, or is volatility finally waning?
Here's a chart of the Volatility Index and it has fallen below 20, below the 200-day EMA, and below a rising support line. I think the reaction to today's CPI could be the key to the action over the next week or so. If the VIX bounces here, we could see some backing and filling of those gaps that were opened on the index charts yesterday. If the VIX slips further below those support lines, the rally in stocks may have more to go."
And here's what happened as that confluence of support held on the VIX, and we got that spike up.
The CPI report was was bad enough but the market seemed to deal with it as we saw a poor open triggered by the CPI, come right back to move into positive territory, but then some comments from the St. Louis Fed President James Bullard saying that he was "open to a 50-basis point hike in March and wanted to see a full percentage point of hikes, or 100 basis points, by July."
That pushed the probability of a 0.50% rate hike (not 0.25%) in March from 24% to 95%. It was 7% just a month ago, so things are changing.
In this intraday chart of the DWCPF, or S-fund, we saw a weak opening get bought immediately, and the small caps spent much of day above the prior day's close of 2035 and firmly in positive territory, before Bullard's comments hit the wire.
Of course the bond market reacted with a sharp rally in yields as the 10-year hit 2% for the first time since the summer of 2019. I don't think this was too much of a surprise since the trend was clearly up and heading that way, but getting there was a shot heard 'round the world. The 2 / 10 year yield curve is steepening quickly, but hasn't inverted yet.
As I said above, the charts didn't get broken so the bulls do have a chance to mend this, but the bears have not left the building yet. The negative outside reversal bars don't look encouraging but most of the charts remain above support. The High Yield Corporate Bond (HYG) prices look very concerning and may be a big red flag.
From Thursday's commentary:
"This morning we will get a key inflationary economic report in the CPI. This one has been a market mover of late, so is the market ready for another jolt, or is volatility finally waning?
Here's a chart of the Volatility Index and it has fallen below 20, below the 200-day EMA, and below a rising support line. I think the reaction to today's CPI could be the key to the action over the next week or so. If the VIX bounces here, we could see some backing and filling of those gaps that were opened on the index charts yesterday. If the VIX slips further below those support lines, the rally in stocks may have more to go."
And here's what happened as that confluence of support held on the VIX, and we got that spike up.
The CPI report was was bad enough but the market seemed to deal with it as we saw a poor open triggered by the CPI, come right back to move into positive territory, but then some comments from the St. Louis Fed President James Bullard saying that he was "open to a 50-basis point hike in March and wanted to see a full percentage point of hikes, or 100 basis points, by July."
That pushed the probability of a 0.50% rate hike (not 0.25%) in March from 24% to 95%. It was 7% just a month ago, so things are changing.
In this intraday chart of the DWCPF, or S-fund, we saw a weak opening get bought immediately, and the small caps spent much of day above the prior day's close of 2035 and firmly in positive territory, before Bullard's comments hit the wire.
Of course the bond market reacted with a sharp rally in yields as the 10-year hit 2% for the first time since the summer of 2019. I don't think this was too much of a surprise since the trend was clearly up and heading that way, but getting there was a shot heard 'round the world. The 2 / 10 year yield curve is steepening quickly, but hasn't inverted yet.
As I said above, the charts didn't get broken so the bulls do have a chance to mend this, but the bears have not left the building yet. The negative outside reversal bars don't look encouraging but most of the charts remain above support. The High Yield Corporate Bond (HYG) prices look very concerning and may be a big red flag.
It was a very painful day for the bulls but the bull flag on the chart of the S&P 500 (C-fund) is still intact. The gap that was opened on Wednesday is filled already and it took that monster reversal to do it. It's that negative reversal day however, that can switch momentum, and the bulls would have to react right away or risk a breakdown. A test of the January lows wouldn't be the worst thing in the world to happen to stocks. It could cement in a low, but there's no guarantees it would hold so the bulls would probably prefer to avoid that.
The DWCPF (small caps / S-fund) also saw a big gain disappear, although at least this one did not give back all of Wednesday losses. Not yet, anyway. The 50-day EMA has been tough resistance, which tends to be the case in a bear market. That 2000 area really needs to hold on the downside as it looks like a possible bear flag or rising wedge formation.
The EFA (I-fund) is the same - trading between moving averages with the 200-day EMA being important support after breaking above it the prior day.
BND (Bonds / F-fund) is ugly and it keeps getting uglier. Again, stretched to the downside and due for a relief rally, but why bother?
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
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks for reading. Have a great weekend!
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.
