Someone flipped a switch at about 11 AM ET yesterday, stopping a strong morning rally and pushing the indices down, and into the red before bouncing back a little in the final hour of trading. The Dow gained 75-points and the Nasdaq was up 1%, but they all closed off their highs, and the small caps continue to lag, posting a modest loss on the day. We've see some very positive action in the tech heavy Nasdaq, but there are a few charts that are on the brink, looking over a precipice.
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Daily TSP Funds Return
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The action remains very volatile making it particularly difficult for us TSP'ers who need to make our allocation decisions before noon ET each day, 4 hours before the market closes, and lately we've seen the market flip upside down between that deadline and the closing bell.
Also, the world has changed since 1984 when that noon ET deadline was imposed. Of course it was a lot worse back then because the TSP only allowed one transfer per month, and you had to make that move by the 15th of the month to be effective on the first of the next month. Can you imagine?
But with almost all brokerages giving instant transactions and $0 commissions, why are we limited with how many transfers we can make, mid-day deadlines and, in this day and age, why does it take 5 hours for the TSP to publish the share prices each day when my broker can tell me that info in real-time?
But I digress.
Yesterday's volatile session ended with gains in the three major indices, but small caps were down as I mentioned. The Nasdaq saw more advancing stocks than declining, but on the NYSE it was nearly 2 to 1 decliners over advancers. Volume was similar, and the New Lows easily outpaced the New Highs showing the average stock is struggling.
If we compare the S&P 500 Index with RSP, its Equal Weighed equivalent - meaning, the same 500 stocks but all stocks are measured equally and not by size, we can see there is a much more bearish story being told by the stocks that are not the top tech stocks, mostly from the Nasdaq. The RSP closed right on its lowest level of the year yesterday while the S&P 500 ($SPX) close 4% above the low made a couple of weeks ago. Same stocks, different calculation. The TSP's C-fund is the $SPX so it favors anyone in that fund, but what is the story this divergence is telling us about the stock market as a whole?
The Dow Transportation Index, a good barometer of economic conditions, closed yesterday at its lowest level since January 6th, and it is in an ugly looking bear flag on the brink of a breakdown. It is considered one of the market leaders and that RSP chart above is certainly following along. Same for the small caps (S-fund), whose chart will be shown down below.
Yields are also a good indicator for what is happening with the economy, and while the 10-year yield is down to a more "comfortable" level than we saw at the peak of the inflation scare rally that saw starting in late February / early March, it is now on the brink of a breakdown from that bear flag and that would push it below its 200-day EMA. The reason it is falling is because the interest rate hikes are starting to take their toll on the economy.
Looking at the different charts, the S&P 500, Nasdaq, small caps, Transports, etc., makes it difficult to have an overall opinion on the market, and perhaps we just have to be more selective with our funds. In a normal bull market most stock funds will move in the same direction. This hasn't been the case in recent weeks.
The S&P 500 saw its second consecutive failed breakout yesterday, despite the moderate gains by the close. It has spent the last week bouncing between its 200-day exponential moving average (blue) and its 200-day simple moving average (orange.) It's also back below its 50-day EMA. It's 4% above its March 13th low, but below significant descending resistance. It's churning for an eventual bigger move, but which way? The small caps and the Transports may be suggesting a move lower, but the Nasdaq stocks in the S&P 500 are trying to keep this buoyant.
The DWCPF (S-fund) was down sharply at one point yesterday, testing the recent lows but holding, however that bear flag (red) technically did break down and I think this has to bounce back quickly or the bear flag downside targets could get ugly.
The EFA was flat on the day after it failed at its resistance line again. However, the TSP gave the I-fund a healthy gain since the selling in the US stocks came after the overseas markets were closed. That will be adjusted with today's price. Those open gaps below give us a clue that there may be more downside before upside, but the bullish "V" bottom formation off of the 66 area looks intriguingly bullish. 68 and 70 appear to be the lines in the sand.
BND (bonds / F-fund) did the unexpected, although we did mention that new bullish looking flag (green) in Thursday's commentary. That, and the open gap near 74.30 suggested we could see some higher prices in the F-fund. The action in yields also suggests this could go higher but that would go against what the obvious bearish looking head and shoulders pattern (blue) is suggesting.
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Thanks so much for reading. Have a great weekend!
Tom Crowley
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