The Dow had a big day on Friday, but otherwise it was a mostly tepid expiration Friday, thanks to a late push higher into the close. It was not a tepid week as the three TSP stock funds were all up another 1.6%, tacking onto a May's big gains halfway through the month. Bond yields and the dollar have pushed off recent lows and a lull of economic data will continue this week.
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Daily TSP Funds Return
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This is a post options expiration week and like holiday weekends or new months, there is tendency for the action to change direction after expiration Fridays, and it did feel like they were trying to hold the market up in the final two trading days last week near certain options strike prices, and they don't need to do that this week so stocks may be a little more vulnerable.
The 10-year Treasury Yield pushed higher on Friday after bouncing off of support on Thursday. However, there is some overhead resistance in play and the short-term fate of the stock market may depend on whether or not the 10-year will get above 4.45% this week. Again, there's not a lot of economic news coming out this week so it's the bond market speculators that will determine direction.
The dollar also rebounded off of recent support although it did close flat on Friday. There's lot of support coming from underneath after the recent pullback. What would keep the dollar strong?
How about the Fed's relentless reduction of its balance sheet, which acts like an interest rate increase, and it may be the key to keeping inflation under control right now? It went down another $49 billion last week. This is healthy economic action, but if it keeps the dollar buoyant and the support on UUP holds, the stock market may have a harder time moving up.
The price of oil has been behaving and has trended lower since the early April peak. It could be a sign of economic weakness if the reason for the decline is a drop in demand. The chart looks vulnerable to to another leg lower if the red head and shoulders pattern breaks down like the smaller blue one did. The blue H&S actually hit its downside target already and that's where it has bottomed so far. That $78 area looks crucial.
The Dow Transportation Index is also a good tell for the economy, and right now it is lagging the S&P 500 by quite a bit. It did bounce back above some key moving averages this month, which have since held on retests, but it also failed to get back over an old support line, which looks to have become resistance near 15,750.
I showed these two charts last week but it's worth repeating as the long term outlook is up against some strong resistance so any further upside would be impressive, but that would also stretch the already taut rubber band a little further. Look how far above the respective 200 period moving averages these chart are: 100-points on the weekly charts, and 2526-points on the monthly chart which is nearly double where the 200-month moving average is right now (2777 vs. 5303.)
After the closing bell on Wednesday Nvidia will report earnings, and that has become one of the highlights for the market each quarter. There is some overhead resistance in a double top, but the trend is rising and support is coming up from below.
I am a little concerned for the short-term and there are some headwinds, but the bulls still have momentum and until that changes it's hard to get too bearish unless you want to be anticipatory.
The S&P 500 (C-fund) made new highs last week, doing so with a gap up, breakout candlestick. It tried to retrace some of that move on Friday but only made a little dent. The open gap near 5250 is a possible pullback target but it would have to get back below the breakout line to do that. Then we'd have to be concerned about a double top pullback, which could be anything from modest dip to fill that gap, to a full blown double top peak on the worst case scenario side. Thursday's negative reverse is still in play unless or until the S&P can recapture that high.
DWCPF (S-fund) had a sharp pullback on Thursday so the moves in this fund continue to be wide, whether on the upside, or down. There's an "F" flag channel climbing and these can go on for some time, but they tend to eventually break the downside, and the loss tends to wipe out a good portion of the flag's gain, so be careful if you see that channel break.
The EFA (I-fund) has been on a tear in May, hanging right with the US stock funds with the help of the pullback in the dollar this month.
BND (bonds / F-fund) was down as yields saw some strength late last week. The open gap is right there for the taking but it would have to get back into that large trading channel and fall below the descending resistance line to get it done.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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