For the second day in a row we had a positive open that turned out to be the highs of the day and we saw stocks give up their gains as the day went on, and by the close the indices posted modest losses. The Dow closed down 179-points, which percentage-wise was one of the laggards, along with the recently high flying small caps and the Transports, both of which pulled back into failed breakout territory.
Daily TSP Funds Return
As we talked about in the last two reports, Monday's big rally was triggered by an emotional event with some merit for stocks, and those type of gap up Monday morning rallies have a tendency to back and fill, and that's what we saw late Monday and eventually into Tuesday's close. The market was in need of a catalyst and it got one from Treasury Secretary Mnuchin over the weekend and then, with some profits in their accounts, investors said why not take something off the table until we can come up with the next catalyst? And some new hawkish trade talk yesterday gave them an excuse to do so.
Also as we've mentioned, the rising price of oil, the rising interest rates and bond yields, and a stronger dollar could put some pressure on equity prices. Yes, individually they are actually positives, but now the formula is determining if this economic growth is going to be faster or slower than the inflationary pressures. That's the key. Growth is good, but the market likely won't rally if inflation is keeping pace.
Congress was voting on loosening some post financial crisis banking regulations last night that, depending on the outcome, could impact the financial sector, so that could a catalyst in this market that is searching for direction.
The S&P 500 / C-fund opened higher but posted a negative reversal day and it is now back down testing that small bull flag (green) and the open gap that was opened on Monday morning. So far the S&P has held within that larger red rising trading channel, which we have been calling a bear flag. The big question for investors has been whether it can break to the upside of that level, and Monday's rally may have prematurely given them some hope. Reversing the emotional Monday morning rally was not a big surprise, but now that those gains are largely diminished, can this find some support or will it be revisiting the 50-day EMA, or even the bottom of the large red bear flag?
The S-fund moved above the area that we have called the middle of the head test on Monday, but now Tuesday's negative reversal puts it back within the head and shoulders formation. Typically these head tests are tough areas to get above so that 1405 area looks to be the pivot point that we need to watch here.
The Dow Transportation Index also reversed and pulled back within its trading range making it a failed breakout for now. There was a tiny open gap filled, which is always tidy, but the action makes it look like it will be more than just that.
The EAFE / I-fund was up slightly and and the IEE closed back above the prior February and April highs again. This chart may not be accounting for the late sell-off in U.S. stocks yesterday so I won't read too much into that little breakout yet.
The yield on the 10-Year Treasury was flat but the chart has created a small bear flag, and that could mean it is a precursor to an attempt to fill the open gap near 3.0%.
The AGG (Bonds / F-fund) was flat and it is basically doing the opposite of what the 10-year yield is doing. There's a large open gap that may need filling but there's some tremendous resistance building between 105.5 and 105.8.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Like what you're seeing on TSP Talk? Why not Tell a Friend about us? We'd really appreciate it, and they may too. Thanks!
The easiest way to print this commentary is to copy and paste above into a document like Word.