Thursday saw a stealth rally in stocks as small caps and the broader indices rallied on a pullback in bond yields and the dollar. However, the big three major large cap indices were down sharply with Salesforce and the Magnificent 7 large cap tech stocks dragging down those more closely watched indices lower. The Russell 2000 small caps and the S-fund bounced back from Wednesday losses with decent gains, and market breadth was actually quite strong.
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It may be too little, too late for some of these small cap indices but they did a good job battling back while the large caps were sinking yesterday. Take a look at the advance / decline ratios on a day where the major indies were all deep in the red.
Maybe the PCE Prices report will confirm a positive turnaround for stocks, although the charts still look questionable.
The 10-year Treasury Yield and the dollar pulled back yesterday, filling in open gaps from Wednesday, and we are seeing a lot of backing and filling of gaps on several charts. Today's PCE report could easily create yet another gap on this and other charts, and we'll talked about that possibility below.
Watch out for a possible fake out rally today - and I only say that because we had a similar move after the PPI triggered rally on April 11. After the negative outside reversal day and some overhead gaps opened, the PPI report on April 11 sent stocks higher and filled an overhead gap, similar to the one that we have on the chart now. The rally on April 11 failed the next day.
And here's the full S&P 500 (C-fund) showing the similarities. Perhaps this one will be the rug pull for the bears who will see this and go all in one the bearish side, only to see the opposite happen, but charts tell a story of investor reactions, emotions, fear, and greed and it makes sense that it could repeat itself. Of course the PCE report will have to be favorable for stocks today to repeat it.
The small caps outperforming yesterday was a result of the decline in yields, but here's a look at the difference between the S&P 500 and the IWM Russell 2000 Small Caps chart going back a few months. Notice that the S&P 500 is still positive since March 8, one of the peak days in the IWM, while small caps are down during that time. Everyone is placing bets on whether the market rally will finally broaden out to the smaller companies, or if big tech will continue to set the pace.
The Dow Transportation Index was up big on Thursday but even that gain just filled an open gap so there's more work to do here. This chart is quite oversold and more relief wouldn't be too much of a surprise at a double bottom, but can the bulls follow through?
We will get the PCE Pricing and Personal Spending and Income Reports this morning before the opening bell. Inflation is on the ballot today and this once unnoticed report has become one of the more important economic reports each month - and for good reason. The Fed is watching closely.
I don't know if the Trump guilty verdicts will impact the markets in any way, but it's possible.
DWCPF (S-fund) partially filled in an overhead gap yesterday but it remains below the 50-day EMA for a second straight day. That's bearish but it's possible that this pullback is just the right shoulder of a bullish inverted head and shoulders pattern - it's tough to say, but job one for the bulls here is getting back above that 50-day EMA.
The EFA (I-fund) also tried to fill in Wednesday's large open gap. The weak dollar helped, but it too was just filling in a gap, so there's work to be done. The 20-day EMA and the prior highs support line has been reclaimed and that's good news for the bulls.
BND (bonds / F-fund) filled two different gaps in the last two days. It closed just above the 50-day EMA after two closes below it. The red trading channel was clearly broken but it may be too early to say that it is in a downtrend, although it, and bond yields, are trying to suggest a change in trend has started.
Thanks so much for reading! Have a great weekend!
Tom Crowley
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