The broader stock market had a wave of negative catalysts thrown at it yesterday, and that led to a sea of red numbers. The recently volatile Nasdaq was hit the hardest because of another sell off in memory stocks, and that bleeds into the S&P 500 as the largest tech stocks are also part of that index. Small caps fell in sympathy, but also because yields moved up again.
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Daily TSP Funds Return
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Today's highlights include the important Consumer Prices Index (CPI) report, which could either justify the recent jump in bond yields if it comes in hot, or if it is cool, yields may come down from their highest level in two months. We will also hear from the new Federal Reserve Chair Kevin Warsh as he testifies in front of congress. It will mostly be a political show, but investors will be listening for any clues the Chair may have on the economy and the direction of interest rates.
There were several obstacles thrown at the stock market yesterday. The price of oil shot up nearly 10% after more chaos in the Strait of Hormuz over the weekend. Yields and the dollar have been triggering off those large moves in oil, and they both rallied like baby ducklings following their mother duck.
Oil is at a key level where the descending resistance line meets the 200-day EMA. I don't know if the CPI report can trump what's going on in the Strait of Hormuz, but it would have to be pretty benign to stop the recent momentum in oil, if the resistance cannot.
The 10-year Yield and the dollar also jumped dramatically, putting a ton of pressure on the stock market.
Even worse yesterday was the decline in the semiconductors and other big tech names. The Semiconductor Index was down nearly 5% on the day and it is once again testing a key support area. Yesterday's decline did fill in a gap that needed filling.
That bearish head and shoulders pattern looks ominous, but as I have pointed out several times over the years, these formations are actually continuation patterns, and they are much more bearish when the trend was down before the H&S was formed, and in this case, the semis rallied into the head and shoulders so there is a chance that this could find support here and break upward. However, I say that with very little confidence because H&S patterns just look like trouble. Two or three closes below 530 on this chart above could be a deal breaker for the bullish case.
The S&P 500 (C-fund) pulled back to retest the top of the pennant formation that it broke above last week. We could say that was an obvious technical move but clearly the bulls will need help from those four charts above before it can make any move toward the previous highs.
The near crossover of the PMO momentum indicator over its moving average yesterday can be a sign of being short-term overbought, so the dip was typical action after a 10-day rally off the 50-day moving average. It needed a rest, but the PMO looks better now. The MACD Histogram is also improving so if the bears win this battle, they will have done so going against some bullish indicators.
A closer look at the S&P 500 and the pennant formation shows us that the index is about where it was during a mid-May peak. This has been a long consolidation, and that is what a pennant formation is - a consolidation, and in this case it is consolidating the huge rally from late March through June 1, and this does not look bad. If it falls below 7450, that would be a different story, and a curve ball for technical analysts.
We came into this week with some positive momentum but the negative catalysts were just too much for that to roll into Monday. With the CPI report coming out before the opening bell, and the Fed Chair on display on Capital Hill today, the bulls may be in need of a Turnaround Tuesday. If support breaks and doesn't recover quickly, we'll have that bearish clue. Buying the dips has worked so well this year but it is never as easy as that sounds, because the market is indicating some issues, and we know the Fed is serious about possibly raising rates, and that won't be ideal for the market, but is it already priced in with this recent pullback / consolidation?
The PPI wholesale prices report comes out on Wednesday morning.
Additional TSP Fund Charts:
The DWCPF (S-fund) pulled back again yesterday and it finds itself testing the lower end of the ascending trading channel. This is the second test in the last four days, something that did not happen in the prior tests. The 50-day average is about 45-points below yesterday's close, and that's a potential target if the channel breaks.
ACWX (I-fund) fell sharply and closed below its 50-day moving average for just the second time in 3+ months. It closed back below its blue ascending channel, and if the price of oil doesn't stop rebounding soon, this could be the first technical casualty of the TSP stock funds.
BND (bonds / F-fund) broke down yet again as rising bond yields continues to weight on bond prices. Many layers of support have been broken here, and the 200-day average is about to to get tested again. The middle of the head of the inverted head and shoulders pattern looks like it is going to be tested.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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