Stocks continued their rebound off of Friday's lows yesterday and the TSP stock funds all gained over 1% on the day, with small caps adding closer to 2%. The Nasdaq was up 1.6% despite heading into beleaguered Tesla's earnings after the bell yesterday. Yields and the dollar were down yesterday helping take the pressure off stocks, but they remain in a range and that's good enough for investors right now.
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Tesla reported and missed earnings estimates after the bell yesterday, but they were up 11% after hours. Expectations had gotten so low that anything short of a disaster may have brought in buyers. Tesla is in the middle of their conference call as of this writing so thing could change, but so far so good and it looks like it won't be a headwind for the Nasdaq today.
We got a big two day rally off a meaningful pullback in the indices. Although it's always tough to pull the trigger when stocks are falling fast, it was really just a matter of time. Most people understood that relief was due but now trying to be on the right side of what happens after an oversold bounce gets more tricky. Will it continue to bounce or roll over and resume the pullback?
Here's a reminder of how a similar pullback played out in the summer / fall of 2023. The snap back rally lasted for two weeks, which is actually a fairly long relief rally, but it was a bumpy ride with a shakeout about half-way through the bounce.
The 10-year Treasury Yield continues to be the key as it is the bond market's take on which way rates are going. As I mentioned yesterday, the flat action is OK with the stock market, but if we see a breakout above 4.7% which starts a new leg higher, it may change things. The open gaps below suggest some possible backing and filling in yields and Friday's PCE could do that - or it could send it to that new leg higher, so that is a key day for this stock market rally, and the bond market right now is showing stability but still flirting with a new highs.
I don't want to get too wonky, but the inflation picture is far from over. It has been tamed in that it is slowing, but prices are still going up faster than 2%. What the Fed is worried about, and why they are backing off from cutting rates, is because they learned a lesson from the 1970's inflation fiasco.
Twice in the 70's, after the Fed raised interest rates to thwart inflation, only to have to cut them aggressively when the economy suffered. And what happened afterward?
Inflation, which was getting under control in 1974 - 1975, came back strong in the late 1970's and into the 80's. This is the sensitive time, especially if the Fed cuts rates.
So, we have a nice relief rally. Stocks may be OK and can continue higher, but the Fed's battle is a tough one and the more we hear them squawking about potentially not cutting in 2024, the more investors will be disappointed, even though it may be best for the inflation situation. If we see a repeat of the late 1970's, everyone will be squawking.
The best scenario may be no cuts, no hikes, and a stable bond market that keeps investors calm. Friday's PCE Prices Report is the next mile marker for the inflation situation.
Meta and IBM highlight today's earnings releases, and tomorrow Microsoft, Alphabet, and Intel will be the market movers.
The S&P 500 (C-fund) has put together two impressive days after holding at the 100-day EMA, but here it is smacking into the 50-day EMA. A stall here would not be a surprise. A gap up above the 50-day EMA would ease some concerns. There is an open "stealth" gap between Monday's close near 5010 and yesterday's low of 5028, so that's always a possible pullback target. It's still in a downtrend, but the bulls are trying to put up a fight.
DWCPF (S-fund) had a big day gaining 1.8% on the day. There is some resistance in the way with the 50-day EMA just 12 points above the current level, and some old broken support that may now act as resistance (blue line.) A move above 2010 looks like the green light for a continued rebound toward the recent highs. Until then, it may not be as easy going forward.
The EFA (I-fund) bounced cleanly off the 100-day average after several days of successfully testing the support. It cut through the 50-day EMA yesterday and stalled at the 30-day EMA. The 30-day average shouldn't be too much resistance after cutting through the 50-day, but it was a strong indicator of support when it traded above that 30-day average, so it could be stubborn on the way back above it.
BND (Bonds / F-fund) rallied nicely and nearly filled in that open gap. This could be trying to bottom but it's too early to say with Friday's inflation report looming out there.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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