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The good news yesterday was that there was a big rally and, unlike Tuesday, the gains held into the close - for the most part. The bad news is, they stalled at the February highs again so we still have the same questions - a breakout, or a double top pullback? Perhaps the Tuesday reversal was the double top pullback? The Dow ended the day up 290-points and once again we saw investors flip flop between the Nasdaq and the Russell 2000, and yesterday was the Nasdaq's day to lead.
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The bulls were unable to take it over the new high threshold and resistance level again, but the bears were unable to add to Tuesday's negative reversal off that double top. The S&P 500 had a huge day gaining 47-points, or 1.4%, but for some reason it felt a little unsatisfying because we know, being at the double top, it could roll right back over today, and the bulls may have given with those bears another opportunity to pounce, if they want it. If or when we see a breakout, the bears will likely get out of the way.
With the S&P being up over 20-points early on Tuesday but then closing down 27, than rallying 47 on Wednesday - basically just getting back Tuesday's negative reversal, it's a little unsettling because that's not exactly a market on cruise control. The VIX has come down dramatically from this year's highs, but it is still above 20 and that means we could see these swings continue, although nothing like we saw a few months ago. It makes for a better trading environment, but we may have some restless nights when we're on the wrong side of these moves.
The valuation of the market has gotten way ahead of itself as companies still struggle to recapture the pre-coronavirus business environment. However, the big picture seems to be telling us that the future is set up for good things to happen to the economy. We have near 0% interest rates again, and below is the Money Supply chart suggesting that we have market liquidity out the wazoo. That's a technical term you may not understand. :)
Short-term however there are a few concerns, but with the future looking good, we could see the dips continuing to be shallow, and dip buyers may be at the ready continually frustrating those who are under-invested looking for opportunities to buy.
The double top situation may give them a chance or, as you'll see in some charts below, we could see a breakout first, that gets sold later. Both are very possible. The double top has been such a good pullback indication over the years, but as I've been saying lately, it looks so obvious that the market may not make it that easy.
There was a little selling in the futures after hours after Cisco reported earnings, but nothing too significant.
The S&P 500 (C-fund) stretched up toward the February highs again but came up just short again, although it was another post-pandemic closing high. The short-term rising trading channel (blue) is about 100 or so points wide and so we shouldn't be surprised if we see it move within that range, giving us some short-term volatility. This would be looking fantastic if...
... we weren't also dealing with this - February's high and possible double top resistance. There's not a lot of magic here. Either it breaks out or it doesn't. There tends to be a short-term pullback, but not necessarily all the time. Sometimes we get a breakout, that later pulls back.
Here's a few recent examples:
In 2015 - 2016 there was a wall near the 2015 highs, both the one from July and the one in November. There were several failed attempts to breakout giving us those classic double, triple and even quadruple tops before we saw a breakout. And even after it did breakout, it pulled back as we heading into the 2016 election.
In 2018 the chart looked very similar to today's 2020 chart in that we had a sharp decline, then a steady climb back to the old highs where we did get a breakout. It held for a while but eventually failed a month or two later.
The 2019 chart saw a couple of double top pullbacks, and the first one looks more classic to me. In June it hit a double top and we saw a few days of pullback before it bounced back to break out. In September a double top was a precursor to a pretty sharp pullback. In October the triple top attempt saw a breakout.
So there's no exact roadmap and we're on our own to figure it out. Some of the cracks I see could be telling us that the double top is going to produce a pullback, but I never underestimate the market's ability to do the less obvious. A breakout would likely trigger more scared money into the market allowing it to rally a bit further - then the market could pull the rug out from under us.
The DWCPF (S-fund) was up sharply and even though we see those black candlestick formations on the chart this week, it actually closed at its highest level since February again yesterday. It's climbing its rising trading channel and, for reference, its highest all-time close was 1587 so it is still 2% below it.
The EAFE (I-fund) popped back above, and closed above, the resistance line after Tuesday's failed breakout. The dollar headed down again, helping the I-fund, so perhaps the relief rally in the dollar is over?
BND (Bond ETF / F-fund) took another hit and it reminds us that markets tend to go down faster than they go up. The recent strong economic data and inflation concerns have finally broken this trend, but is this now a buyable dip? Possibly, if you're choosing bonds (F) over cash (G). But with the pandemic starting to fade some, we may have seen the low in yields for the year, and that would be a bearish sign for bond prices and the F-fund - looking out more than a few days.
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Chart provided courtesy of www.sentimentrader.com
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