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Stocks bounce back

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Stocks snapped back on Monday, from the pre-holiday geopolitical jitters. The Dow gained 184-points and the S&P 500 grabbed back all of Thursday's losses, and a good part of Wednesday's. Small caps and the Transports led on the upside, which is a good sign considering they had both been flirting with breakdowns.

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The market was doing well most of the day but some comments from Treasury Secretary Steven Mnuchin accelerated things higher into the close. He basically backed off of his August tax reform goal because of healthcare, but believes it will be done by the end of the year.

This recent action, although clearly a result of the geopolitical environment, also fell in the category of the pre / post holiday reversal pattern. That is, stocks can often move in one direction just before a holiday, and reverse back afterward, which seems to be what has happened so far.

The rally came on some fairly light volume and we haven't had two positive days in the row in the S&P 500 all month so we'll see if the bulls can give some follow-through today.  The situation with North Korea is far from over.

The SPY (S&P 500 / C-fund) easily bounced back above the 50-day EMA and the bottom of the descending parallel channel. Descending may be the key word as stocks are in a short to intermediate term downtrend right now and have more work to do to break that. 237 on the SPY would be helpful and on the downside, 232 may be the line in the sand.

The DWCPF (S-fund) had a big day rallying up to some possible strong resistance - the old support line it fell through on Wednesday of last week, and the 50-day EMA. Sometimes these pennant type breakouts (or breakdowns in this case) turn into fake outs and they reverse and break the other way. Normally that happens earlier in a pennant so being near the apex now, that may not be the case. We'll see.

The Dow Transportation Index rallied strongly gaining back Thursday's losses, but after the breakdown from the "F" flag, this is just a minor reversal from the downtrend. Some decent earnings out of the airlines last night may help here today and we're still on the "h" formation watch. These tend to break down, but sometimes the "h" low forms a double bottom.

The EFA (I-fund) rallied back up to the bottom of the rising parallel channel, so like the U.S. indices, there's more work to be done on the upside before we can call Monday's rally anything but a temporary relief rally.

The High Yield Corporate Bond Fund remains in that flag formation and it looks fairly bullish except for the fact that it has continued to shy away from the early March high. If the bull flag breakout to the upside, as bull flags tend to do, we could see those old highs tested, and that could be a green light for stocks.

The AGG (Bonds / F-fund) slipped as investors had their attention diverted to stocks for a day. As we have been saying, we think this push higher in bonds, at least the move above the resistance near 109, was more driven by fear and the safety trade while stocks were falling. For the rally in bonds to continue, stocks would probably need to remain weak, and I don't if that will be the case.

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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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S&P 500 (C Fund)
DWCPF (S Fund)
Dow Jones U.S. Completion Total Stock Market Index (^DWCPF)
EFA (I Fund)
iShares MSCI EAFE Index (EFA)
AGG (F Fund)
iShares Lehman Aggregate Bond (AGG)