After gapping up at the opening bell on Thursday after Nvidia's earnings beat, the market had to deal with some hot inflation data that is not normally influential, and that sent yields spiking higher and the entire day's complexion changed. The Dow lost 600-points, small caps lost 1.5%, and several of the charts created negative outside reversal days, which can be troublesome.
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This is what that looked like as the S&P 500 opened 33-points higher on Thursday, pulled back to fill the gap, which is not totally unusual, although it was rather quick, but then at 9:45 ET we got the S&P Global US Manufacturing PMI report. Not exactly a household economic report and rarely influential, but that's exactly when yields shifted, and the stock market had a difficult time moving higher from there.
Was this just one of those pre-holiday reversals? Or, as we saw on Wednesday, is this the type of data that the Federal Reserve has been worried about? They have been concerned about inflation and told us they were
data dependent. Well, here comes the data.
The change to interest rate target probabilities wasn't dramatic, but it was the second day in a row that the probability of an interest rate cut went down. You can see below that the chances that the current Fed Fund's Rate remains unchanged through the September meeting went from 27.4% a month ago, to 48.4% yesterday. The chances that we would see a 0.50% cut (down to 4.75% - 5.0%) between now and the September meeting went from 23% to a 4.7% chance.
The 10-year Treasury Yield was the first to react as it aggressively moved above the 50-day EMA and its descending resistance line, after Wednesday's tease above those levels.
The dollar also rallied and both charts created positive outside reversal days which generally is a bullish sign for these charts, which has been bearish for the stock market.
The S&P 500 (C-fund) did the opposite as it was up making new highs at the opening bell, and by the close it was below Wednesday's lows and retesting the breakout line. Those negative reversal days can be nasty as we saw in April. It would not be unusual to retrace some of those losses with short-term relief to the upside like it did in April, but typically it means the trend may have reversed for a while.
The Dow Transportation Index had been trying to tell us that something was going on after it failed to hold above its moving averages several days ago, and it has been lagging the S&P by a wide margin. So, unless this was just a short-term smoke screen, this market leader was leading -- on the downside.
Worldwide geopolitical anxiety, political strife in the US, plus more signs of sticky inflation, and this market could have a really big wall of worry to climb. The one thing keeping the market afloat right now is the huge potential that A-I has to increase productivity around the world, and Nvidia's big gains reminded us of that.
From tsp.gov: Holiday Closing
"Some financial markets will be closed on Monday, May 27, in observance of Memorial Day. The Thrift Savings Plan will also be closed. Transactions that would have been processed Monday night (May 27) will be processed Tuesday night (May 28) at Tuesday's closing share prices."
DWCPF (S-fund) had a modest pullback earlier in the week, but yesterday it took care of testing some key support levels already. It's far from giving back all of the big gains we've seen in May, but that support must hold or those gains could be in jeopardy.
The EFA (I-fund) also fell to its old resistance area and that's not unusual after a strong breakout. That resistance often become support but it has to hold otherwise the next levels of support are quite a bit lower.
BND (bonds / F-fund) fell back into that large descending channel with Thursday's losses. It fell to the 20-day EMA and held on the first test, so the question is whether yields, which move in the opposite direction of bond prices, have change their trend back to the upside, or if the recent move up in yields was just a short-term relief rally.
Thanks so much for reading! Have a great holiday weekend! Let's remember those who sacrificed everything for this great country!
Tom Crowley
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