Stocks opened higher on Monday but investors stepped lightly after last week's volatility, and the midday selling began. However, that didn't stop a repeat of Friday's late surge of buying into the close. Yields fell sharply again so it was no fluke last week when they started to pullback, and the data continues to confirm the move as inflation gets cooler but the economy is also cooling. The broader indices started lagging again as the Magnificent 7, and more precisely, Nvidia, is keeping the S&P 500 and Nasdaq indices in the leadership roles. Small caps were down yesterday.
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We have a small trend going on here the last two trading days with higher opens, midday swoons, and a surge of buying into the close. "They" say that late buying in generally considered smart money. Being the paranoid investor that I am, I wonder whether this is sincere buying, or an attempt from the smart money to suck in more nervous investors before the next shoe drops. I'm leaning toward the more conventional - late buying is good, but nothing would surprise me. These are 1-minute charts of the last two days of trading.
I am intrigued by the small caps that keep giving investors some hope, only to get swatted back down and outperformed by the large cap techs that continue to garner the most attention. The Russell 2000 small cap index gapped way up on Monday morning but fell flat and actually tested Friday's low before bouncing off the lows after successfully testing its 50-day EMA yet again.
One of the reasons for this action in the smaller cap indices is the tremendous moves we see in Gamestop that traded another 160 million shares yesterday. It closed at 28, which was a one day gain of 21%, but it was as high as 40 earlier in the day, so the swings here are bringing volatility to the small cap indices.
And of course our S-fund (DWCPF), which is not the Russell 2000 but rather a combination of the Russell with other stocks that make up all US stocks minus the S&P 500 stocks, was riding the waves of the small caps, and it had a very volatile day as well, closing on the downside. Despite some late buying, it could not close above the 50-day EMA.
Seeing the small caps lag while the 10-year Treasury Yield was down again yesterday, is concerning. Yesterday we got more weak economic news from the Atlanta Fed who lowered their 2nd Quarter GDP estimate down to 1.8% from 2.7%. On May 15th they had moved it to 3.8% so it is going in the wrong direction. Lower yields help small caps in general, but a weak economy will hurt them.
And this was after the weakest Chicago PMI reading since the COVID economic panic.
Yesterday's move was a little more bullish than the April chart comparison that I talked about expensively in recent reports, but it is still on my radar because the comparison is not completely broken yet. The comparable gap is still open just below 5310. I will post another chart tomorrow if it looks like it is still alive after today.
We get the May jobs report on Friday. I'll post some estimates later in the week.
The May AutoTracker winners have been posted, and what a month it was. Here are the winners and here are the monthly and annual (non-premium members) standings through May. That reversal on Friday dramatically changed the outcome. Without that reversal my return (TSP Talk Plus System) would have been in the top 5 for the year. Instead the reversal gains in the C-fund pushed met down 60+ spots. Now I have to fight my way back. :)
The S&P 500 (C-fund) chart gapped above the resistance line, fell back below it, but then another late rally pushed it back above it again. It was another positive reversal day and it is holding above some key support. I have to say this looks a lot better than it did a couple of days ago. What changed? Cool inflation, a cooler economy, both of which took yields down? I don't see a clear fundamental reason to buy but the chart looks good as long as it remains above the 5260 area. That gap I have been watching is just about closed and that could be an issue if it acts as resistance as it did in April.
The EFA (I-fund) also popped above key resistance and is eying new highs. It's tough to find much wrong here, but a close back below 81 would do it change that.
BND (bonds / F-fund) is back in rally mode as yields fell hard again. It is taking out resistance although leaving some open gaps behind that may need attention.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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