Stocks opened higher yesterday, but it turned into a turnaround Tuesday as stocks started to fall while Federal Reserve Chair Janet Yellen was giving testimony to congress. The Dow did gain 5-points, but other than the Transports, most stock indices closed in negative territory - although they did close off their lows.
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In a flashback to Greenspan's "Irrational Exuberance" statement in the1990's, Yellen offered that small caps, biotech, and social media stocks are "stretched", and that put pressure on the Nasdaq and the Russell 2000.
The SPY (S&P 500 / C-fund) didn't waste any time filling the open gap created on Monday. It was closed by Tuesday morning so that's something we don't have to worry about anymore. By that I mean, when there is a gap open you always have to wonder when it is going to get filled. If the S&P blasted off without filling that open gap, we'd always be looking back at it in the rearview mirror wondering when we'll be revisiting it.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
With the gap filled and the support line of the short-term rising trading channel holding, we have to look at this as a bullish development. Too bad some of the other charts aren't in the same situation.
The Russell 2000 made a lower low yesterday before rebounding. Janet Yellen's comments about small caps being overvalued didn't help. I find it interesting that the open gap from early June continues to pull the Russell toward it. Yesterday it closed right at the bottom of it. Whether it means anything, I don't know. I do know that the Russell is now back below the 50-day EMA and potentially in a bear flag. As I said yesterday, this index needs to shape up or the bulls may look elsewhere, stop buying its dips, and leave it behind.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Wilshire 4500 (S-Fund) is holding up a little better as the 50-day EMA held again. We will either have a "U" type bottom here or a bear flag. I think an argument can be made for both. The problem with the Wilshire is that the Russell 2000 may drag it down. The battle may be between the S&P 500 and the Russell, and the winner will take the Wilshire 4500 with it.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
I wanted to follow up on France's CAC 40, which dropped 1% on Tuesday after failing at the old support line that we suspected could turn into resistance. The reason this is important to us, other than that this index makes up about 10% of our I-fund, is that it may be a barometer for the direction of the European economy, and that will impact our stock market at some point.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The dollar rallied strongly during Janet Yellen's testimony sending stocks and commodities lower.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
Bonds were down yesterday and it looks like there is another negative reversal day on the IEF. The 20-day EMA looks like it is trying to act as support, but that EMA hasn't had much of an influence on this ETF. I am going to assume this trading channel between 108.40 and 109.25 will continue - until it doesn't.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
There were some positive earnings after the close on Tuesday and that has the futures slightly higher in early trading.
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Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
Posted daily at TSP Talk Market Commentary
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