It was fun but we knew it couldn't last forever, and stocks finally took a breather yesterday. Some indices, like the small caps, had experienced a parabolic, maybe once in a lifetime, one week rally. The Dow actually gained 244-points yesterday so it wasn't a complete broad sell off, but the losses were stiff where targeted, and closing at the lows did not help. It was the first 1% loss for the S&P 500 since April. Bonds were up modestly after yields and the dollar declined, and the weakness in the dollar helped the I-fund contain its loss.
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The market was due for a pause and it got a couple of excuses after Bloomberg reported that President Biden is considering tougher trade restrictions if companies continue granting China access to U.S.-made technology. Also comments from former President Trump hit the semiconductor / chip sector after he said Taiwan is not paying enough for military protection. My guess is this will blow over quickly, but the market needed a rest, so they used this for now.
The five consecutive 1% or higher daily gains in the Russell 2000 was the first time that had happened since the Russell was created in 1979 (it happened in '79 as well.) The S-fund had 4 consecutive 1% gains with the other being up "just" 0.87%, so a little profit taking yesterday does not seem surprising. Of course we can only speculate whether yesterday's 1% loss in the Russell was just that - a profit taking pause in the rally, or if the rally actually over. The S-fund did take a bigger hit than the Russell, losing 1.62% on the day, giving back a chunk of Tuesday's 2.63% gain.
The negative reversal in the indices would lead market technicians to believe that there could be more short term downside to come, but retracing huge bullish candlesticks is not uncommon in a bull market. There are open gaps below and what this may end up being is a bull flag that could take a few days to play out. But when small caps fall, it can be as fast as they rallied so be careful.
A lot of the gains in small caps was a result of short covering - meaning traders and investors who were betting against small caps had to buy back the shares they had sold short, and that accelerates the buying. They may have also decided not only to cover the shorts, but to get long as well. For those who did make money on the run up, locking in some quick gains in the volatile small caps is not unusual, but will the folks who completely missed the rally look for the pullback as an opportunity to buy? There's a couple of support lines below near 2100 and 2075 on the DWCPF chart above, and at the bottom of those open gaps. By the way, the KRE Regional Bank ETF was actually up 1.2% again yesterday. If you've been reading these commentaries lately you know why that's intriguing.
The giant move higher in the Transports hit a wall this week, and that led to the pullback yesterday, but there is a difference between a double, triple, or quadruple top pullback, and a peak. The psychology of this is that investors who bought near the top at the prior peaks are just happy to get out of the losing positions and back to even, so they sell , but once they are out of the way, the multi-top pullbacks tend to break through on a future attempt. In this case a quad-peak is very unusual.
Typically we have a little lull about this time in July, but it gets better again next week so unless the selling accelerates, this may be normal action, although the swings have been bigger than usual so far this July.
Chart provided courtesy of www.sentimentrader.com
Oil was up 2.9% yesterday and closed back above $83, nearing that $84 level that has been trouble for the stock market over the last year.
With many of the key inflation and economic data reports behind us for at least a couple of weeks, earnings season just getting started, and rate cuts weeks or months away, the market may have gotten ahead of itself, but it may be too early for a sell the news reaction.
The S&P 500 (C-fund) pulled back but no technical damage has been done yet, and even a move down to the 20-day EMA is normal in a bull market, although it would put a crack in rising trading channel. The chart certainly looks ready for a pullback or even a correction, but ahead of earnings season and a probable interest rate cut, I don't expect too much damage. After earnings season or after a rate cut, maybe.
The EFA (I-fund) also dipped but losses were contained as the dollar fell 0.45%, helping cushion the blow from the US stock losses.
BND (bonds / F-fund) moved higher again and this is clearly in a new uptrend now that inflation is longer considered a problem. That said, it's floating near the top of that trading channel with open gaps below, so there is room to roam lower if it wants, without breaking the upside trend.
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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For more info our other premium services, please go here... www.tsptalk.com/premiums.html
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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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The market was due for a pause and it got a couple of excuses after Bloomberg reported that President Biden is considering tougher trade restrictions if companies continue granting China access to U.S.-made technology. Also comments from former President Trump hit the semiconductor / chip sector after he said Taiwan is not paying enough for military protection. My guess is this will blow over quickly, but the market needed a rest, so they used this for now.
The five consecutive 1% or higher daily gains in the Russell 2000 was the first time that had happened since the Russell was created in 1979 (it happened in '79 as well.) The S-fund had 4 consecutive 1% gains with the other being up "just" 0.87%, so a little profit taking yesterday does not seem surprising. Of course we can only speculate whether yesterday's 1% loss in the Russell was just that - a profit taking pause in the rally, or if the rally actually over. The S-fund did take a bigger hit than the Russell, losing 1.62% on the day, giving back a chunk of Tuesday's 2.63% gain.
The negative reversal in the indices would lead market technicians to believe that there could be more short term downside to come, but retracing huge bullish candlesticks is not uncommon in a bull market. There are open gaps below and what this may end up being is a bull flag that could take a few days to play out. But when small caps fall, it can be as fast as they rallied so be careful.

A lot of the gains in small caps was a result of short covering - meaning traders and investors who were betting against small caps had to buy back the shares they had sold short, and that accelerates the buying. They may have also decided not only to cover the shorts, but to get long as well. For those who did make money on the run up, locking in some quick gains in the volatile small caps is not unusual, but will the folks who completely missed the rally look for the pullback as an opportunity to buy? There's a couple of support lines below near 2100 and 2075 on the DWCPF chart above, and at the bottom of those open gaps. By the way, the KRE Regional Bank ETF was actually up 1.2% again yesterday. If you've been reading these commentaries lately you know why that's intriguing.
The giant move higher in the Transports hit a wall this week, and that led to the pullback yesterday, but there is a difference between a double, triple, or quadruple top pullback, and a peak. The psychology of this is that investors who bought near the top at the prior peaks are just happy to get out of the losing positions and back to even, so they sell , but once they are out of the way, the multi-top pullbacks tend to break through on a future attempt. In this case a quad-peak is very unusual.

Typically we have a little lull about this time in July, but it gets better again next week so unless the selling accelerates, this may be normal action, although the swings have been bigger than usual so far this July.

Chart provided courtesy of www.sentimentrader.com
Oil was up 2.9% yesterday and closed back above $83, nearing that $84 level that has been trouble for the stock market over the last year.
With many of the key inflation and economic data reports behind us for at least a couple of weeks, earnings season just getting started, and rate cuts weeks or months away, the market may have gotten ahead of itself, but it may be too early for a sell the news reaction.
The S&P 500 (C-fund) pulled back but no technical damage has been done yet, and even a move down to the 20-day EMA is normal in a bull market, although it would put a crack in rising trading channel. The chart certainly looks ready for a pullback or even a correction, but ahead of earnings season and a probable interest rate cut, I don't expect too much damage. After earnings season or after a rate cut, maybe.

The EFA (I-fund) also dipped but losses were contained as the dollar fell 0.45%, helping cushion the blow from the US stock losses.

BND (bonds / F-fund) moved higher again and this is clearly in a new uptrend now that inflation is longer considered a problem. That said, it's floating near the top of that trading channel with open gaps below, so there is room to roam lower if it wants, without breaking the upside trend.

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.