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Fed Minutes reverse early losses

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It wasn't looking good for the bulls heading into the early afternoon, but the release of the Fed minutes, which is not normally a market mover, reversed the action and most indices closed positive, and at the highs of the day. The Dow ended the day up 52-points reversing a 170-point decline at the lows earlier in the day. The Transports closed in negative territory, and the I-fund stumbled with the dollar making new intraday highs.

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A midday pop up after the release of the Fed Minutes served to give investors some optimism that Fed may not be as aggressive on interest rates because they said will allow inflation to run above 2% for a "temporary period." That most likely will not change the fact that we will get another rate hike in June, but the chances of further tightening, if we look at the Fed Fund Futures, was cut just slightly by the announcement. This was not really a big deal.

Interestingly, yields were pulling back sharply before the release of those minutes early on Wednesday, as if the info may have been leaked early, but in reality we mentioned in yesterday's commentary that the chart looked like it wanted to pullback and fill the open gap near 3% and... there it is. It was trading at 2.99% after-hours yesterday.




Of course it opened another gap near 3.06% in the process, so now we have a set up for a potential bounce back in yields already.

The market reversal was certainly impressive as we saw a rebound in the Dow of over 200-points from low to high, but as we've been saying, investors are clamoring for the next catalyst, but I don't think this was a market changing event and higher inflation would actually put pressure on corporate margins, so we could see this emotional rally run out of steam very quickly, except for maybe two things ... a bull flag on the S&P, and pre-holiday action.

Tomorrow is Thursday the 24th so the next two days have a very slight positive bias that could be helpful to the bulls, but next week's averages are more meaningful with Tuesday being the only negative, and the +3 and after days may be related to the first few trading days in June, which have a good record, and always comes later in the week of Memorial Day week.


Chart provided courtesy of www.sentimentrader.com


The TSP will be closed on Monday for the holiday. Per tsp.gov, "Transactions that would have been processed Monday night (May 28) will be processed Tuesday night (May 29), at Tuesday's closing share prices."




The S&P 500 / C-fund was down early and it filled that small open gap, but it blew right through that gap and it wasn't looking too good. But then the Fed Minutes were released and it gave the bulls an opportunity, and they took it. After looking like it was not going to manifest, that bull flag looking formation (green) is now back in the picture, but again the large red bear flag is still in play as well. At this point that 2710 area looks to be the key support level.




The S-fund also had a nice positive reversal but the head test line is still holding and we did get a lower high / lower low yesterday so officially it in a short-term downtrend. If we get some upside follow-through to yesterday's reversal, that could change.




The Dow Transportation Index closed slightly lower on the day as it was off quite a bit before the Fed Minutes were released. We know the line in the sand is the top of that trading channel which has held for basically four months now.




The EAFE / I-fund lagged and the late rally in U.S. stocks doesn't get taken into consideration in the index since the overseas markets are closed by 11:30 AM ET, but the TSP can take some liberties with that knowledge. The gap lower is concerning since it broke below a rising wedge pattern but it did close right on the 50-day EMA.




The price of oil pulled back yesterday but there is strong support at $71. If this market is rallying on higher energy prices, holding above $71 may be a key, but as I've been saying, I don't think the consumer is all that happy about $70+ oil.




The AGG (Bonds / F-fund) rallied strongly opening another gap (red) while trying to fill that large gap (blue) above 105.70. The 10-year Treasury has filled its gap already so does that mean this one will follow? It seems logical but if the 10-year yield finds support at its filled gap level near 3% (see chart near the top) that would put pressure on bond prices again, so maybe not.




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

Tom Crowley


Posted daily at www.tsptalk.com/comments.php


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