Retail sales easily topped expectations early on Wednesday and, like the CPI on Tuesday, the initial reaction was negative as this was seen as inflationary and an irritant to the Fed who is seemingly trying to put the breaks on this economy. But once again dip buyers stepped up rather quickly, and the buying accelerated into the closing bell. The Dow was the laggard with a modest 39-point gain, and for the second day in a row the small caps and Nasdaq led on the upside. Bonds were down again as yields continue to rally, which is causing some head scratching on Wall Street.
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After nearly a year of stocks and yields moving in the opposite direction, the recent pop in yields has not hindered the market this week. Instead we have been seeing some resiliency in stocks as economic data is improving causing yields to rally. The stock market is either looking forward and reacting to something that we may not know about yet, or it is on a kamikaze mission flying into the jaws of more interest rate hikes, which may be considered unprecedented considering the speed at which rates have been rising.
A closer look at the action in the 10-year Treasury Yield shows that it may be stretching out toward the open gap, which was nearly filled yesterday, and it is also a test of the head of that large head and shoulders pattern. If that's the case, then an argument can be made that this rally in yields may be just about out of steam. The question is, if they do reverse down, will stocks rollover with them, which wouldn't make too much sense unless a recession is in the equation. If instead the 10-year moves above 4%, I think the stock market rally could finally say enough is enough and run out of steam. It just hasn't happened yet.
The dollar broke above its flag formation without any attempt at filling that large open blue gap near 27.50. But again, the stock market, which had been moving counter to the dollar for a long time, didn't seem to mind.
As far as inflation goes, one of the biggest problems was the high price of oil and gas, but in the last 6 months we've seen the price of oil come down 65% off of its summer peak, and natural gas is down about 75%. Of course that puts more money in consumer's pockets which is inflationary itself, but it's good for the economy and lower energy costs is always a relief.
I have no idea what is going on with these divergences except for my typical paranoid outlook that something is out of whack because things aren't adding up. My paranoia is not making me bearish, but suspicious that this rally, which looks great on the charts, is either moving on something that we have not been told about yet, or it will run out of steam after enough people have bought in and the big money can take their profits.
The S&P 500 (C-fund) did breakout above its bull flag in the final hour of trading yesterday, and that's a good sign. 4100 held for a couple of days and that should be support at this point, and a breakdown below that would be a warnings sign. This chart doesn't show it but there is an open gap just above 4200 and that could be one of the eventual overhead targets for this leg up. The MACD Histogram is showing a negative divergence, which is concerning, but the price action remains good.
DWCPF (S-fund) plowed its way back above that breakdown candle from last week, and the top of its bull flag, and made its second highest close for this fund in many months. Why small caps are outperforming while interest rates are still rising is another head scratcher. Again I will say, something is up that I may not know about yet.
The EFA (I-fund) lagged yesterday and the 0.68% gain in the dollar did not help. The chart looks fine as long as that consolidation remains above the recent lows. Otherwise it could be a rounded top forming.
BND (Bonds / F-fund) slipped further down yesterday and it is now testing the lower end of the parallel channel that I drew in yesterday. I think we can say it's now or never for the F-fund with that large open gap looming below.
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 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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After nearly a year of stocks and yields moving in the opposite direction, the recent pop in yields has not hindered the market this week. Instead we have been seeing some resiliency in stocks as economic data is improving causing yields to rally. The stock market is either looking forward and reacting to something that we may not know about yet, or it is on a kamikaze mission flying into the jaws of more interest rate hikes, which may be considered unprecedented considering the speed at which rates have been rising.
A closer look at the action in the 10-year Treasury Yield shows that it may be stretching out toward the open gap, which was nearly filled yesterday, and it is also a test of the head of that large head and shoulders pattern. If that's the case, then an argument can be made that this rally in yields may be just about out of steam. The question is, if they do reverse down, will stocks rollover with them, which wouldn't make too much sense unless a recession is in the equation. If instead the 10-year moves above 4%, I think the stock market rally could finally say enough is enough and run out of steam. It just hasn't happened yet.
The dollar broke above its flag formation without any attempt at filling that large open blue gap near 27.50. But again, the stock market, which had been moving counter to the dollar for a long time, didn't seem to mind.
As far as inflation goes, one of the biggest problems was the high price of oil and gas, but in the last 6 months we've seen the price of oil come down 65% off of its summer peak, and natural gas is down about 75%. Of course that puts more money in consumer's pockets which is inflationary itself, but it's good for the economy and lower energy costs is always a relief.
I have no idea what is going on with these divergences except for my typical paranoid outlook that something is out of whack because things aren't adding up. My paranoia is not making me bearish, but suspicious that this rally, which looks great on the charts, is either moving on something that we have not been told about yet, or it will run out of steam after enough people have bought in and the big money can take their profits.
The S&P 500 (C-fund) did breakout above its bull flag in the final hour of trading yesterday, and that's a good sign. 4100 held for a couple of days and that should be support at this point, and a breakdown below that would be a warnings sign. This chart doesn't show it but there is an open gap just above 4200 and that could be one of the eventual overhead targets for this leg up. The MACD Histogram is showing a negative divergence, which is concerning, but the price action remains good.
DWCPF (S-fund) plowed its way back above that breakdown candle from last week, and the top of its bull flag, and made its second highest close for this fund in many months. Why small caps are outperforming while interest rates are still rising is another head scratcher. Again I will say, something is up that I may not know about yet.
The EFA (I-fund) lagged yesterday and the 0.68% gain in the dollar did not help. The chart looks fine as long as that consolidation remains above the recent lows. Otherwise it could be a rounded top forming.
BND (Bonds / F-fund) slipped further down yesterday and it is now testing the lower end of the parallel channel that I drew in yesterday. I think we can say it's now or never for the F-fund with that large open gap looming below.
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 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.
