Another day of selling for stocks on Friday as the market tries to price in the combination of elevated inflation, bank failures, bailouts, interest rate hikes, increased liquidity, etc. The Dow lost 385-points and once again small caps lagged badly, while the S&P 500 alternated between losses and gains every day last week. Bonds rallied as yields came down with investors sensing the possibility that the Fed may not raise interest rates this week, which had been the expectation before the bank failures.
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[TD="width: 338, align: center"] Daily TSP Funds Return
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The TSP funds were quite mixed last week with the C-fund tacking on an impressive 1.49%, while the S-fund flipped from positive to negative with Friday's big decline and ended with a 1.66% loss for the week. The small regional bank stocks, which have been clobbered, permeate the S-fund's DWCPF index. Meanwhile the I-Fund was down 2.49% with the Credit Suisse news contributing to a near 3% one day loss on Wednesday.
One week ago the market was pricing in a 0% chance that the Fed won't raise interest rates this week. Now that has moved up to a 38% chance. A week ago it was pricing in a 40% chance of a 0.50% rate hike. Now it that is at 0%, so the market is pricing in a 62% chance of a 0.25% hike on Wednesday.
The 10-year Treasury yield fell from 3.7% to about 3.4% on the week, and the 2-year Treasury had its fastest move from a 6-month high to a 6-month low in many decades, going from over 5% to 3.8%.
This sent the 2/10 year yield curve back over -0.50 (still inverted) for the first time this year. Anything under 0.0 is inverted. You can see that the most recent spikes in the yield curve have led to selling in the S&P 500, but once that started to move lower again, the S&P rebounded. The first time the 2/10 inverted back in April of 2022, the S&P 500 put in a second lower high and moved precipitously lower into the summer months. The inversion was brief, but it re-inverted again in July.
There isn't a direct correlation between a yield curve inversion and a market sell off or rally, but as we've been talking about since that first inversion in April of last year, they do tend to be a precursor to an economic recession, generally with a 6 to 18 month delay. It has been almost a year since that first inversion and 8-months since the July 2021 inversion, where it has remains ever since, but we don't have any real signals of a recession yet, although it is anticipated. Higher interest rates have a way of killing economies and the Fed has been on a mission raising rates for the last year and the economy may start feeling those effects soon.
I posted these charts below last year and you can glean whatever you can from them, but they are the previous yield curve inversions and how the S&P 500 reacted during and afterward. The one commonality in these is that the S&P 500 peaked AFTER the yield curve inverted in every situation.
This time around, the S&P 500 actually peaked in January BEFORE this current inversion began, so that was different.
We'll go over the TSP stocks charts down below but I find it interesting that the S&P 500 is sitting 16 points above 3900, which has repeatedly been an important area on the chart, often finding either support or resistance and reversing course.
Buckle up. It's going to be another wild week, as they generally are when the Fed makes a move on interest rates. They are doing a lot more than raising (or not raising) interest rate this week as they have provided liquidity by increasing their balance sheet for the first time in a while. This is generally a bullish trigger for stocks, although it may counter some of their inflation fighting efforts and potentially be seen as a negative as some point.
Chart source: https://fred.stlouisfed.org/series/WALCL
This market is certainly vulnerable to something very ugly as market crashes tend to manifest from existing weak market action rather than from off a high. But at the same time when things look their worst and investors are at a high level of fear, you can often get a short term relief rally that moves further than you'd expect. Unfortunately it is tough to say which will come next, but the Fed will have something to say about it on Wednesday of this week.
The S&P 500 (C-fund) had a high volume options expiration day of trading on Friday ending a week that saw alternating days of losses and gains, starting the week with a loss on Monday and ending with a loss on Friday. Sometimes these options expiration days turn out to be turning points, but that was not the case after the September expiration but in December most of the damage had been done by expiration day although the turnaround didn't start until January a few of weeks later. Technically there are all kinds of issues on this chart. If there's anything positive to say it could be that the index may be oversold in the short-term.
The DWCPF (S-fund) has been getting hit hard and and the swings have been very wide. Unlike the S&P 500, this index was down for the week and is flirting with another breakdown as it consolidates near the recent lows. There is an open gap up by 1670 where some old broken support may become tough resistance.
The EFA (I-fund) also broke down last week and the Credit Suisse issues pushed it down below the 200-day EMA, however it never did close below that average. 68.50 looks like the area it would need to crack in order to improve the chart.
BND (bonds / F-fund) has been testing the top of the right shoulder of its head and shoulders pattern. If the H&S pattern plays out typically, we could see lower prices and higher yields in bonds this week. And, it would eventually break down. However, if stocks do stumble, then fundamentally we could see investors move more into 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
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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[TR]
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[TD]
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[TD="width: 338, align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
The TSP funds were quite mixed last week with the C-fund tacking on an impressive 1.49%, while the S-fund flipped from positive to negative with Friday's big decline and ended with a 1.66% loss for the week. The small regional bank stocks, which have been clobbered, permeate the S-fund's DWCPF index. Meanwhile the I-Fund was down 2.49% with the Credit Suisse news contributing to a near 3% one day loss on Wednesday.
One week ago the market was pricing in a 0% chance that the Fed won't raise interest rates this week. Now that has moved up to a 38% chance. A week ago it was pricing in a 40% chance of a 0.50% rate hike. Now it that is at 0%, so the market is pricing in a 62% chance of a 0.25% hike on Wednesday.
The 10-year Treasury yield fell from 3.7% to about 3.4% on the week, and the 2-year Treasury had its fastest move from a 6-month high to a 6-month low in many decades, going from over 5% to 3.8%.
This sent the 2/10 year yield curve back over -0.50 (still inverted) for the first time this year. Anything under 0.0 is inverted. You can see that the most recent spikes in the yield curve have led to selling in the S&P 500, but once that started to move lower again, the S&P rebounded. The first time the 2/10 inverted back in April of 2022, the S&P 500 put in a second lower high and moved precipitously lower into the summer months. The inversion was brief, but it re-inverted again in July.
There isn't a direct correlation between a yield curve inversion and a market sell off or rally, but as we've been talking about since that first inversion in April of last year, they do tend to be a precursor to an economic recession, generally with a 6 to 18 month delay. It has been almost a year since that first inversion and 8-months since the July 2021 inversion, where it has remains ever since, but we don't have any real signals of a recession yet, although it is anticipated. Higher interest rates have a way of killing economies and the Fed has been on a mission raising rates for the last year and the economy may start feeling those effects soon.
I posted these charts below last year and you can glean whatever you can from them, but they are the previous yield curve inversions and how the S&P 500 reacted during and afterward. The one commonality in these is that the S&P 500 peaked AFTER the yield curve inverted in every situation.
This time around, the S&P 500 actually peaked in January BEFORE this current inversion began, so that was different.
We'll go over the TSP stocks charts down below but I find it interesting that the S&P 500 is sitting 16 points above 3900, which has repeatedly been an important area on the chart, often finding either support or resistance and reversing course.
Buckle up. It's going to be another wild week, as they generally are when the Fed makes a move on interest rates. They are doing a lot more than raising (or not raising) interest rate this week as they have provided liquidity by increasing their balance sheet for the first time in a while. This is generally a bullish trigger for stocks, although it may counter some of their inflation fighting efforts and potentially be seen as a negative as some point.
Chart source: https://fred.stlouisfed.org/series/WALCL
This market is certainly vulnerable to something very ugly as market crashes tend to manifest from existing weak market action rather than from off a high. But at the same time when things look their worst and investors are at a high level of fear, you can often get a short term relief rally that moves further than you'd expect. Unfortunately it is tough to say which will come next, but the Fed will have something to say about it on Wednesday of this week.
The S&P 500 (C-fund) had a high volume options expiration day of trading on Friday ending a week that saw alternating days of losses and gains, starting the week with a loss on Monday and ending with a loss on Friday. Sometimes these options expiration days turn out to be turning points, but that was not the case after the September expiration but in December most of the damage had been done by expiration day although the turnaround didn't start until January a few of weeks later. Technically there are all kinds of issues on this chart. If there's anything positive to say it could be that the index may be oversold in the short-term.
The DWCPF (S-fund) has been getting hit hard and and the swings have been very wide. Unlike the S&P 500, this index was down for the week and is flirting with another breakdown as it consolidates near the recent lows. There is an open gap up by 1670 where some old broken support may become tough resistance.
The EFA (I-fund) also broke down last week and the Credit Suisse issues pushed it down below the 200-day EMA, however it never did close below that average. 68.50 looks like the area it would need to crack in order to improve the chart.
BND (bonds / F-fund) has been testing the top of the right shoulder of its head and shoulders pattern. If the H&S pattern plays out typically, we could see lower prices and higher yields in bonds this week. And, it would eventually break down. However, if stocks do stumble, then fundamentally we could see investors move more into 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
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.
