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Market Commentary

October 6, 2022
 
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Stocks were down on Wednesday but certainly not out after a vigorous rally off the morning lows.  The Dow lost just 42-points after reversing a 400+ point morning decline.  The ADP employment report came in stronger than expected and that sent yields and the dollar rallying.  Since the recent decline in yields and the dollar propelled stocks higher to start the week, seeing them turn back to the upside gave some investors a reason to take profits.  This action certainly magnifies the importance of the September jobs report which comes out on Friday morning.

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Retracing some of the 5-6% gains that we saw to start the week is typical, but where that pullback lands was the question, and the late action favored the bulls.  Not that it has to stay that way because, with the jobs report coming up tomorrow, we could see a lot of positioning moves causing volatility before the report.  

We'll get that September jobs report tomorrow morning and the estimates are looking for a gain of about 250,000 jobs, and an unemployment rate of 3.7%.  Remember, good news may be bad news, and bad news may be good news.  A strong report could send the indices back to the lows, and a weak report could keep the relief rally going.

The weekly jobs numbers and JOLT report we've seen recently leading up to Friday have actually been resilient so while I don't claim to have any idea what this report will bring, the data suggests that the September jobs report may not be as weak as the stock market hopes.  That said, we've seen some jobs reports that are complete head scratchers this year, and well off the estimates. 

With that massive two day rally this week, we may see some profit taking leading up to tomorrow's report, but as we saw yesterday, the weakness in stocks may have brought in some of the FOMO (Fear Of Missing Out) crowd who may have missed the rally this week.

The rally in the 10-year Treasury yields and the dollar yesterday flipped those chart back to the upside, although the dollar went up enough to fill an open gap but then closed back near the lows of the day.  If this bounce in yields, which put it back above support, means another trip up toward the September highs, the stocks market rally would have a very difficult time continuing.

         


I posted this in the TSP Talk Plus report yesterday for subscribers but I wanted to show it here in the public area:  The longer-term VIX chart shows that the fear levels have been extremely muted compared to other bear markets.  Can the bottom for the stock market be in with the VIX only hitting 35 at the highs this year?  We saw 60 at one point during 2008, and mid-50's during COVID.  Back in 2001 it temporarily peaked at 35, but the bear market was only half over at that point and it eventually made it up to 40.

           


This is another chart I posted a while back showing how trading volume tends to explode near bear market lows.  We have seen nothing even close to the volume we saw on the bottom of this 2008 - 2009 bear market chart.

     


We got a "spike" up to 3.5 billion at last Friday's low, and yesterday's volume on the S&P was less than 2.5 billion.  That doesn't smell like capitulation.  There are a couple of open gaps still below, one being a stealth gap from Friday's closing  low to Monday's low.  It doesn't show up as an actual gap on the chart but I put a red box there where Friday's close and Monday's low created that a gap.  Lots of resistance in the 3800 and 3900 areas.

         


Now, before I get too doom and gloom, there is a strong tendency for the stock market to struggle during the first three quarters of a mid-term election year, and then between mid-October and the end of the year, we have seen some really positive action.  So far the first three quarters of this mid-term year have done their part.

      
            Source: https://www.isabelnet.com/sp-500-index-performance-during-midterm-election-years/

Of course we don't have bear markets in the first three quarters of every mid-term cycle, so this is just some gee-wiz info.
 



I posted the S&P 500 (C-fund) above so here is the DWCPF (S-fund / small caps).  We have the same gaps on this chart as I mentioned on the S&P 500 chart.  The neckline of the head and shoulders pattern, as well as the 20-day EMA in the same area, are the immediate resistance levels that this chart needs to penetrate to keep the relief rally going.

         


The EFA (I-fund) fell 1% and most of that had to do with a 0.95% gain in the dollar yesterday.  The gaps are meaningful on this chart as well with one down near 57 and one all the way up near 63.  The resistance here is also the neckline of the head and shoulders pattern near 60.

       


The BND (bonds / F-fund) fell yesterday and that may have turned what could have been  "V" bottom into more of a bear flag look.  The outcome of that will be huge for the bond market.  If yields start to flirt with last week's highs again, this chart will break down again.

         


Read more in today's TSP Talk Plus Report.  We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems.  For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

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

Tom Crowley

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Chart provided courtesy of www.sentimentrader.com
 
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