It looked as if we were finally seeing a shift into a small caps but that short-lived trend seemed to change back to favor large caps in the final two days of trading last week. It was a good sign while it lasted, but right now the market can't seem to lift all boats at the same time. When one goes up, the other suffers. The Dow gained 43-points on Friday and the S&P and Nasdaq closed with gains, although well off their morning highs, but small caps in the S-fund lagged with a moderate loss. Yields were up so bonds and the F-fund were down.
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We head into this FOMC meeting week with the probability of another 0.25% interest rate hike at 30%. Between now and that Wednesday decision we will get both the CPI and PPI reports (consumer and production prices) so that could be more fuel for the Fed's decision. The data has been showing improving inflationary numbers so that is encouraging, but inflation is fickle and can come back surprisingly quickly, so I don't even want to speculate.
What I can speculate on is what is happening to the dollar, and how it has been reacting to the Federal Reserves balance sheet, and watching the balance sheet and the dollar may help give us some clues.
I usually use UUP for my dollar charts, but because of a recent strange, extremely wide candlestick on the daily UUP chart that looks a little distorting, I'm using the $USD chart. The reason I don't use this normally is because this chart isn't updated until much later in the day and after I have completed my commentary for the following day. But I digress...
This daily dollar chart shows a recent pullback after a big rally in May. This was why the I-fund lagged quite a bit in May since a strong dollar negatively impacts international stock prices when priced in dollars. But the point is, we've seen a recent pullback, however it could be a bull flag that will eventually break out to the upside.
This weekly chart above (back to the UUP where you can see the odd candlestick on this one as well) has been able to hold above that rising support line a few times since the 2021 lows, so this remains in an uptrend. That's not great for stocks in general, but especially the I-fund. On the other hand there is some possible resistance at last week's highs near about 28.70 - and it seems to be an important area.
One thing that greatly impacts the dollar is the Federal Reserve's balance sheet. When the money is flowing and the balance sheet is rising, it tends to be negative or bearish for the dollar, but bullish for stocks. When the balance sheet it dropping they are taking money out of the system and and that generally strengthens the dollar.
I posted this chart last week and it shows that the Fed was reducing their balance sheet to start the year, but once the regional bank failures started to pop up, they temporarily opened the spigots in March and the dollar pulled back. Of course stocks got a little panicky during that banking crisis but the drop in the dollar saw the I-fund lead the TSP funds for a couple of months.
Source: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
Here's the point, you can see in the chart above that the Fed actually increased their balance sheet by a "small" amount ($10 billion) last week rather than reduce it again. And, not surprisingly, the TSP stock funds were all up last week. But you can see that when the Fed has been reducing their balance sheet this year, they don't tend to increase it two weeks in a row, except in that case of the bank failure rescue. So I would guess we see another reduction this week.
Here is the weekly chart of the dollar (UUP) versus the I-fund and I'm probably not telling you anything you didn't already know, but the clear trend is that they tend to move in different directions.
We see similar trends with US stocks, but not to the same degree. Dollar up, stocks feel the pressure. Dollar down, stocks have a breeze at their backs.
So here come the CPI and PPI reports and the FOMC meeting, and these can be dollar movers. With the UUP chart having overhead resistance as well as rising support beneath it, if we do see a break in one of those red lines we could have that clue we need to point us to which way the stock market wants to trend. That is, if this chart breaks to the upside of 28.70 then stocks could struggle. Or, a breakdown below 28 and stocks could see another leg higher.
Notice what the dollar was doing in 2022 when we were in a bear market.
The S&P 500 (C-fund) made a new high for the year on Friday, but it closed near the lows of the day setting up a negative reversal candlestick which can lead to some further short-term weakness. It's a busy week, and likely volatile week for stocks, and technical analysis may take a back seat to emotion, but for now a move down to 4275, or even 4230 into that open gap, is a possibility to help clean up the chart. The trend is up making me reluctant to get too bearish, but I've seen some signs that sentiment is getting more and more bullish, and maybe near the point of being extreme in the short-term, so I'm not exactly super bullish right here either.
The DWCPF (S-fund) had a good week last week but it is on a 2-day losing streak after Friday's loss. It had come a long way since the end of last month and some backing and filling wouldn't be the worst thing the bulls could see here, as long as the support below can hold.
EFA (I-fund) was down slightly but as we talked about up top, the dollar, as well as the action in the US economy, may dictate whether this can retest those recent highs or not. A breakout above resistance in the dollar could have this chart filling in some open gaps below. Although the nearest open gap is just overhead.
BND (Bonds / F-fund) has been struggling lately as economic data has been coming in a little better than expected recently, so any pricing in of a recession may have been premature, and perhaps this is just some readjusting. Yes, a recession is still possible, but yields are going up for a reason (prices move counter to yields) and it's not because the economic data is weak.
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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We head into this FOMC meeting week with the probability of another 0.25% interest rate hike at 30%. Between now and that Wednesday decision we will get both the CPI and PPI reports (consumer and production prices) so that could be more fuel for the Fed's decision. The data has been showing improving inflationary numbers so that is encouraging, but inflation is fickle and can come back surprisingly quickly, so I don't even want to speculate.
What I can speculate on is what is happening to the dollar, and how it has been reacting to the Federal Reserves balance sheet, and watching the balance sheet and the dollar may help give us some clues.
I usually use UUP for my dollar charts, but because of a recent strange, extremely wide candlestick on the daily UUP chart that looks a little distorting, I'm using the $USD chart. The reason I don't use this normally is because this chart isn't updated until much later in the day and after I have completed my commentary for the following day. But I digress...
This daily dollar chart shows a recent pullback after a big rally in May. This was why the I-fund lagged quite a bit in May since a strong dollar negatively impacts international stock prices when priced in dollars. But the point is, we've seen a recent pullback, however it could be a bull flag that will eventually break out to the upside.
This weekly chart above (back to the UUP where you can see the odd candlestick on this one as well) has been able to hold above that rising support line a few times since the 2021 lows, so this remains in an uptrend. That's not great for stocks in general, but especially the I-fund. On the other hand there is some possible resistance at last week's highs near about 28.70 - and it seems to be an important area.
One thing that greatly impacts the dollar is the Federal Reserve's balance sheet. When the money is flowing and the balance sheet is rising, it tends to be negative or bearish for the dollar, but bullish for stocks. When the balance sheet it dropping they are taking money out of the system and and that generally strengthens the dollar.
I posted this chart last week and it shows that the Fed was reducing their balance sheet to start the year, but once the regional bank failures started to pop up, they temporarily opened the spigots in March and the dollar pulled back. Of course stocks got a little panicky during that banking crisis but the drop in the dollar saw the I-fund lead the TSP funds for a couple of months.
Source: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
Here's the point, you can see in the chart above that the Fed actually increased their balance sheet by a "small" amount ($10 billion) last week rather than reduce it again. And, not surprisingly, the TSP stock funds were all up last week. But you can see that when the Fed has been reducing their balance sheet this year, they don't tend to increase it two weeks in a row, except in that case of the bank failure rescue. So I would guess we see another reduction this week.
Here is the weekly chart of the dollar (UUP) versus the I-fund and I'm probably not telling you anything you didn't already know, but the clear trend is that they tend to move in different directions.
We see similar trends with US stocks, but not to the same degree. Dollar up, stocks feel the pressure. Dollar down, stocks have a breeze at their backs.
So here come the CPI and PPI reports and the FOMC meeting, and these can be dollar movers. With the UUP chart having overhead resistance as well as rising support beneath it, if we do see a break in one of those red lines we could have that clue we need to point us to which way the stock market wants to trend. That is, if this chart breaks to the upside of 28.70 then stocks could struggle. Or, a breakdown below 28 and stocks could see another leg higher.
Notice what the dollar was doing in 2022 when we were in a bear market.
The S&P 500 (C-fund) made a new high for the year on Friday, but it closed near the lows of the day setting up a negative reversal candlestick which can lead to some further short-term weakness. It's a busy week, and likely volatile week for stocks, and technical analysis may take a back seat to emotion, but for now a move down to 4275, or even 4230 into that open gap, is a possibility to help clean up the chart. The trend is up making me reluctant to get too bearish, but I've seen some signs that sentiment is getting more and more bullish, and maybe near the point of being extreme in the short-term, so I'm not exactly super bullish right here either.
The DWCPF (S-fund) had a good week last week but it is on a 2-day losing streak after Friday's loss. It had come a long way since the end of last month and some backing and filling wouldn't be the worst thing the bulls could see here, as long as the support below can hold.
EFA (I-fund) was down slightly but as we talked about up top, the dollar, as well as the action in the US economy, may dictate whether this can retest those recent highs or not. A breakout above resistance in the dollar could have this chart filling in some open gaps below. Although the nearest open gap is just overhead.
BND (Bonds / F-fund) has been struggling lately as economic data has been coming in a little better than expected recently, so any pricing in of a recession may have been premature, and perhaps this is just some readjusting. Yes, a recession is still possible, but yields are going up for a reason (prices move counter to yields) and it's not because the economic data is weak.
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.
