TSP Talk - What inflation?

The Producer Price Index (PPI) report came out on Thursday morning and confirmed the prior day's CPI report saying inflation is easing, and perhaps faster than analysts have suspected. The Dow gained 48-points which was well below the percentage gains of the S&P 500 and Nasdaq. Small caps also did well again as the rubber band continues to stretch. The dollar has been in free fall this month, so the I-fund is jumping.

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My condolences to the bears. I feel your pain because I've been one of them. I've been doing this a long time and have been down this road before. I can't count the number of times I have said that stocks can move in one direction or the other a lot longer than seems reasonable. But when it happens it still feels unreal. The bulls of course are basking in the euphoria, as I might be doing if I was on the right side of this current runaway trade.

If I had big gains to protect, I may be taking some profits but also potentially letting a lot my gains run and see how far it can go, with the plan of making sure I didn't lose it all if things turned around.

The partial invested person might be wondering either when it was time to sell the profitable trade and lock in some gains, or look to buy more at the hint of a pullback.

And the overly cautious underinvested is watching this like a deer caught in the headlights, wanting to be in but knowing it's probably closer to being too late to buy than anything else.

The chart that got me was HYG (High Yield Corporate Bond Fund), and in hindsight I put too much emphasis on this one area, but I do watch the credit markets closely as our TSP Talk Plus subscribers know. When that ADP employment report came on July 6 showing a crazy high end beat on jobs, yields soared, stocks fell sharply, and the dollar rallied. That turned out to be a complete smoke screen as the HYG chart clearly broke down that day, but the paranoid person in me is curious how data like that got out when the rest of the data is completely different and took the market in the other direction?

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So now what? We've seen some chart hits and bust through upper resistance and the question is whether this is a selling opportunity for those in stocks, or if this is a new leg up after the recent favorable inflationary data.

For instance, here the DWCPF (S-fund) chart that gapped above the upper resistance line of its red rising trading channel this week. That could have been resistance, but it wasn't, and now there's a new, steeper angle of incline and a new channel (blue.) Notice the fake out breakdown on that same day.

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Is it meaningful that the normal market leader, the Dow Transportation Index, was flat to lower for the last two days while the S&P was up big? I said "normal market leader" because, before this recent rally, it had underperformed the rest of the market for some time.

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The dollar has been spiraling lower since some if these softer inflationary reports have come out, and that has had a lot to do with prices rising broadly, but we know that the I-fund is directly impacted inversely by the movement in the dollar. The free fall in the dollar has meant blast off for the I-fund this month.

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The indices and indicators are stretched and due for a pullback, but the data has been very bullish for stocks and the underinvested are buying in an effort to play catch up. How long can it last? Maybe today, may longer than seems reasonable. Earnings season will start heating up soon and it may confirm or wallop the recent rally.





The S&P 500 (C-fund) didn't have any problem cutting through another layer of resistance yesterday. I talked about fake outs above, and we had a bit of a fake out back in May when the S&P 500 fell below the red rising support line. Here it is a day above above the blue resistance line. Next week we have a different picture than the first two week's positive seasonality in July, and earnings will start coming out. Do the bears have anything in them or have they gone on summer vacation?

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BND (F-fund) fell through a bear flag earlier this month with a lot of the damage coming that same day of that ADP report that was a 360 degree difference than the rest of the economic data that we've been getting. It is back in the bear flag, but the flag lost some of its effectiveness now that it broke down and recovered.

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Thanks so much for reading! Have a great weekend!

Tom Crowley




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