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Market Commentary

February 24, 2020
 
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Stocks fell sharply on Friday with the high flying large tech companies of the Nasdaq actually lagging for once.  The Dow lost 228-points, while the S&P 500 and small caps each gave up about 1%.  The I-fund held up better thanks to some weakness in the dollar - finally.  The dollar had been up 11 of 13 trading days in February before Friday's decline.  Bond yields are at, or near, all time lows, and the 90-day and 10-year yields are inverted.

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The coronavirus seems to be having some impact on stocks and bond yields, although the major indices are just off all time highs, so investors don't seem all that worried.  A little downside momentum may get more attention from "the herd" but until the charts breakdown, it's just another pullback in a bull market.

If you're nervous, stepping aside and seeing how this plays out wouldn't be a bad way to go, because the ups and down of the coronavirus headlines may create the market's volatility now with earnings season mostly out of the way, phase one of the trade deal over, and the Fed saying they are leaving rates where they are for now.

A vaccine may have been developed for the coronavirus but, assuming it will work, there is another problem.  I heard it could take as long as 18 months before it can be widely distributed.  At the rate the virus has been spreading, 18 months would be like an eternity.  At least there are things in place in the U.S. that can keep the contagion down.  It's China we're most worried about now because of their part in the global economy, but they are also working hard to keep it from spreading.

The spread between the 90-day and 10-year bond yields continues to widen and that means the yield curve is getting more inverted.  As we've talked about for nearly a year now when it first happened, that has generally meant economic weakness in the coming year or two.  So far it hasn't, but here it is inverting again.

           


So we have some warnings signs, but until the stocks charts start deteriorating, the bulls probably still have the edge, however the bears may be starting to growl a bit and we'll see if that have any teeth.  The futures opened sharply negative on Sunday night so Monday's open is not looking great.

I will be on the road for a few days and my son, "TommyIV from the forum - who does our Weekly Wrap Up, will be doing Tuesday's commentary for me.  I'll be checking my email and I should be back on Wednesday but my schedule could be a little off.
 



The S&P 500 (C-fund) dipped down to the 20-day EMA (green line) and having recently made a higher high, the trend is still up and support is rising, but for a market timer, trying to miss days like Friday.  One of the possible negatives I see on this chart is that PMO indicator which made a lower high recently, compared to the higher in the S&P 500, and we call that a negative divergence - a  bit of a warning sign.

         


The DWCPF (S-fund) took a 1% hit on Friday, but coming off of a big February rally, it's not anything that looks too troublesome on the chart... yet.  Stocks need to breathe and Friday was just a little exhale.  How much of an exhale is the question going forward now that the indices have been rallying for 5 months.  Even a move down to the 50-day EMA near 1530 keeps the chart in an upward trend.

       


The EFA (I-fund) was down on the day but we finally saw some selling in the dollar after its parabolic move higher this month.  That helped cushion the blow for the I-fund on Friday, but technically this chart is looking broken.

        


We'd probably need to see a dramatic negative turnaround in this chart before the stock market gets too negative.  Right now stocks seem to be trying to price in earnings adjustments to companies that will be impacted by the coronavirus.  But if the credit market stays strong, as this chart indicates, it could mean stocks will hold up just fine after any pullback.

       


That sounded good while I was typing it, but then we get to the bond yields and we have to scratch our heads .  Why the 10-year and 30-year bonds are hitting all time lows in yields has got to mean something. 

10-year Treasury Yield:

        


30-year Bond Yield:

       


All that while gold is breaking out to multi-year highs, while the dollar is at multi year highs - which makes the move in gold even more impressive - has got to mean something.  Is the stock market, and perhaps the credit market, on the wrong page, or is it the bond and gold markets that are off?  That would be a great answer to have.


The AGG (bonds / F-fund) gapped up and made a new high on the day, but it did hit some resistance, backed off and may have created a negative reversal day.  Still, it closed at an all-time high and that means the bond market may not be so keen on economic growth going forward.  Are the bond people just more nervous by nature, or is the stock market, with its automatic pension and 401K deposits, just getting too high?

       


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 for reading.  We'll see you back here next week!

Tom Crowley


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Chart provided courtesy of www.sentimentrader.com
 
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