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Stocks boosted by tax reform talk

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Stocks rallied on Wednesday with President Trump helping the situation by giving his first official speech / talk on tax reform. The Dow ended the day up 27-points, but the broader indices performed much better with the Nasdaq leading with a 1% gain, while the I-fund got a headwind from a strong move in the dollar, and lagged.

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Large tech stocks and financials did well on the day, both of which would benefit most from a corporate tax cut and / or a tax amnesty.

The 2nd quarter GDP was increased to 3.0%, which helped the bulls loosen up a bit.

We've been talking about the pre-holiday strength on the Labor Day chart...


Chart provided courtesy of www.sentimentrader.com

... and those pre/post holiday reversals and yesterday's action did nothing to take that off the table. We got some pre-holiday strength and when we look at the dollar, the Transports, or even gold, it certainly shows breaks from the larger trends that they have been in, which is what these pre-holiday reversals do, and theoretically the larger trend would resume after the holiday. The problem of course is that stocks were struggling before the last couple of days so will they also reverse down next week? One caveat is that a tax reform bill could trump (no pun intended) any holiday trends or biases.
The August Jobs Report gets released this coming Friday and consensus estimates are looking for a gain of about 185,000 jobs and an unemployment rate of 4.3%.

Per www.tsp.gov: "Some financial markets will be closed on Monday, September 4th in observance of the Labor Day holiday. The Thrift Savings Plan will also be closed. Transactions that would have been processed Monday night (September 4th) will be processed Tuesday night (September 5th), at Tuesday's closing share prices."

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The SPY (S&P 500 / C-fund) made a bold move above the descending trading channel yesterday and at the risk of repeating myself, the question is whether this is just a pre-holiday reversal where the larger trend will resume after the holiday? The gap was filled the other day and it has closed above the 50-day EMA for 4 straight days now, so holiday or not, those are good signs.




The DWCPF (small caps / S-fund) also broke a descending resistance line but stalled at the 50-day EMA. Big test coming up, even though the holiday bias could give it a temporary break above the 50-EMA. We'll want to see 3 to 5 closes above it.




The Dow Transportation Index had a solid day yesterday gaining about 0.8%. It's back above the 50-day EMA but the head and shoulders pattern could be just testing the head, right where some resistance comes off the highs.




The Nasdaq 100 finally broke above its bull flag pattern, no matter how you draw it. That bodes well for the tech stocks, but will it hold next week when seasonality gets more negative? That may depend on the tax reform talk.




The EFA (EAFE Index / I-fund) lagged again because the dollar rallied strongly again. Was it pre-holiday strength for the dollar that will be reversed next week? Maybe. The bear flag is still looming, but it remains above the key 50-day EMA.




The AGG (Bonds / F-fund) was fairly flat while bond yields remain near 2.1% which is very low for an economy that is supposed to be heating up. I'm not sure what that means except that the bond market may not be anticipating any rate hikes from the Fed for a while.




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

Tom Crowley


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