Stocks opened sharply higher but an earnings warning from chip making Nvidia spoiled the bulls' fun on Monday. The Dow managed to hold onto a small gain but the S&P 500 and Nasdaq floundered and drifted negative after the news, while small caps ignored it and raced higher. Bonds were up and and the dollar was down slightly. All eyes are now focused on Wednesday's CPI report.
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I'm not sure why small caps did so well. They generally dislike rising interest rate environments, but I suppose they have been selling off for nearly a year on inflation concerns, so maybe higher inflation and higher interest rates are already priced into the smaller companies?
The S&P 500 (C-fund) is battling against some serious resistance after the nearly 15% rally off the lows. The debate continues about whether the June low was a market bottom or just a bear market rally, and I think Wednesday's CPI report will be a key indicator, but it may not be as easy as going with the direction of the response to the report on Wednesday.
I mentioned this yesterday and I have no idea if this is what will happen, but I think it is important to be ready for the possibility. If we get a favorable CPI report and stocks rally, will it be just a knee-jerk fake out breakout move like we have seen a few times already this year? Or can the S&P truly breakout and hold? Or perhaps the news is worse than expected and the S&P heads straight down. It's the first one that I worry about since many could try to buy into the fake out.
As I said, I don't know what will happen, but I am still leaning toward another possible August / September test of the lows so I am still looking at rallies as selling opportunities. If I'm wrong I should know soon enough if a breakout rally does hold for more than a few days. Usually a breakout will come back to test the breakout area, and if that holds, it may tell us that perhaps this is not a bear market rally after all, but rather the end of the bear market.
One of the reasons for my skepticism is that the inversion of the yield curve continues to steepen.
The 10-year Treasury Yield closed at 2.77% yesterday while the 2-year yield is still well above 3% at 3.21%
That's a -0.44 inverted yield curve and I am surprised how little it is being talked about.
The jobs report on Friday was an outlier, and we'd have to wait a month to see if it's a pattern. The weekly jobless claims numbers don't confirm that the jobs market is that strong yet, but we'll have to wait and see. On Thursday the initial jobless claims are estimated to be about 263,000 which is a few thousand more than last week's number, and 20K more than a month ago. So, which reports are accurate? Are people getting jobs, or losing them?
The fact that stocks did not completely tumble after the recent new spending bills were approved, which is inflationary, and the Fed will have to continue to raise rates, and now chip giant Nvdia warns about earnings, may be telling me that the market is stronger than I think? Either that or it is about the roll over again? Question marks.
The DWCPF (S-fund) has been on a good run since the June lows and just recently it broke above its descending trading channel. The 200-day EMA is about 50 points away, and that could be a target, but it is more likely to go the way of the S&P 500 if the CPI is consequential.
The EFA (I-fund) busted above some resistance again after finding support at the 50-day EMA. It looks better and could have its sites set on the 200-day EMA, but it needs to leave that 65 area to do so.
BND (Bonds / F-fund) had a nice day on Monday after Friday 1% loss. The trend remains up although it is still slightly below that inverted head and shoulders neckline near 76.50. Getting back above that would be bullish for bonds.
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