Stocks gapped up on Monday morning, and in a volatile market, Monday gaps are very vulnerable, and that proved to be the case as the Dow, up 400-points at its high yesterday, traded in a 730 range and closed 650-points off those morning highs. Israel fending off Iran's attack eased weekend nerves helping the market rally early, and strong retail sales was a good sign for the economy, but it also pushed the dollar and yields up to new highs for the year.
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Daily TSP Funds Return
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The story remains the same - higher yields and a strong dollar are putting pressure on stock prices as the market adjusts to this new higher yield environment, and the chances of a June interest rate cut continues to deteriorate.
The 10-year Treasury Yield moved above 4.6%, and at some point the market will find this level "normal" but while it is on the move higher, the stock market is adjusting stock prices to account for the impact on company's bottom lines.
The dollar made a 5-month high yesterday and it's the same thought process - a stronger dollar means pressure on prices.
I posted the Dow Transportation Index chart yesterday and I marked a do or die point on the chart near 15,500. Yesterday that do or die point was crossed so now it's a matter of a 3 to 5 day confirmation. If the bulls can't push this back above that 15,500 area in a few days, this could mean trouble for this market leader.
RevShark posted this chart yesterday (originally from zerohedge.com) and it shows what I had mentioned about April and this tax week week in particular. That is that over the last 40 years, the S&P 500 tends to get a boost, whether psychologically or financially, right after people have finished filing their taxes and paid any tax due. That's an average, not a year to year guarantee, but it's pretty convincing.
The action is a lot less bullish than it was a couple of weeks ago but the bulls are not far off so we could see some snap back rallies thrown at us. The question for market timers is whether to try to catch the rallies, and if you do chase, do you sell the relief rallies to book some quick gains? The buy and holders are getting a dose of reality as the 7% 2024 gain that the S-fund had at the end of March, is almost completely gone halfway through April.
The S&P 500 (C-fund) fell through another key level of support as it closed below the 50-day EMA for the first time in many months. There's a big open gap down below 5000 and that could be an eventual target although if the downside continues, we have to concerned about possible water-fall like decline that can get ugly in a hurry. It's a fine line between timing and buying a pullback, and trying to catch a falling knife. So far trading volume hasn't made any major spikes so perhaps more pain is coming to shake out more bulls?
DWCPF (S-fund) is feeling the heat of the higher yields and less likely scenario of an interest rate cut in June. After failing at the 50-day EMA on Friday, it did fill an open gap yesterday and held at the 100-day moving average and sometimes we see some chopping action in between major averages.
The EFA (I-fund) held up rather well yesterday considering the strength in the dollar, but we see that another negative outside reversal day was created. While it doesn't mean today will be a down day, like the we saw on the S&P 500 on April 4, negative outside reversal days don't usually bode well for the intermediate term.
BND (Bonds / F-fund) gapped down on the retail sales numbers and perhaps on the action in Israel as many were expecting worse but no flight to safety (bonds) was needed. The open gaps mean we will probably see higher prices here at some point, but right now the trend is down.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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