Friday put a big punctuation mark on a wild week for Wall Street with a 300+ point rally. It was the 4th day of 300 or more point moves for the Dow, and the one day it was only up 100-points, on Thursday, there was a 300 point intraday swing from low to high. It was a week that saw the first, albeit brief, 2/10 year Treasury yield curve inversion in many years. The more economically sensitive small caps and Transports led on the upside with gains near 2%, while the big three indices were all up well over 1%.
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The Fed’s Jackson Hole symposium is this week and Jerome Powell can use it to clarify whether they are just getting started with cutting rates, or if they plan to cut just a few times as precaution to an economic downturn. Right now the U.S. data isn't bad, but the thought is that Europe and China are getting weak enough that there's little chance that we would come away unscathed.
An inversion of the 90-day and 10-year Treasury happened a few months ago and the Fed took notice and cut rates. Now the 2-year and 10-year briefly inverted intraday last week, although it hasn't done so yet on a closing basis as you can see on this chart (a negative number would imply that), and Friday's action actually reversed the trend and steepened the yield curse. Whether that is a new trend, or just a "relief" move remains to be seen, but that's why stocks rebounded.
The 2 year / 10 year spread was able to stay positive into the close, with a couple of inversions overnight last week. There's another example of a near inversion that was avoided in late 1994 and into early 1995, and stocks applauded the near miss with a big rally for the next few years. Whether that is what is happening now is the question. Obviously it would have been the worst time to sell stocks, but in reality we don't know if the worst is over so it may not be as easy as it was in 1995. Plus, the internet was in its infancy back then and we don't have anything new these days to compare with that world changer. It was the start of the dot com bubble, and the rally off that low lasted for about 5 years.
The VIX (volatility index) was down sharply on Friday but it is still trending higher, with a series of higher lows recently, and it is above the 200-day EMA so traders are expecting stocks to continue to be volatile in the short-term. The futures haven't opened yet as I write this but I wouldn't be surprised by another emotional Monday morning move. Whether that's up or down, I don't know, but we can't always trust that initial Monday opening price.
The S&P 500 (C-fund) had a big day to end the wild week on Friday with the index continuing to bounce off the 200-day EMA, but fell short of recapturing the 100-day EMA. The low just above 2820 has now held three times this month and may be the line in the sand. Whether that was a double or triple bottom remains to be seen, because we could even consider the current formation a bear flat, in which case 2820 would be a vulnerable breakdown point. The 50-day EMA is likely the key for the bulls on the upside. Getting back above that is crucial since it has failed a few times already this month.
A closer look shows the possible bear flag that I mentioned, but there's also the possibility that the flag already broke and now the bottom of the flag could try to act as resistance like we saw in May.
The weekly chart shows that the S&P is still below the rising support line coming off the December lows. Also, there is a lot of room on the downside if this wants to retest the bottom of that wide trading channel. Otherwise, a move and close above 2900 could lead to another test of the highs.
The 50-week EMA on the weekly chart shows that it is being tested again. It has been successfully holding for years, except for that Fed rate high period in the latter half of 2018.
The DWCPF (S-fund) had an error in the chart so we'll use the similar Wilshire 4500 chart. We saw a major rally here and a possible bullish falling wedge pattern created, but there is still some descending resistance that will need to break, or this could easily roll back over.
The Dow Transportation Index gained over 2% on Friday and while it is still below key resistance, even a relief rally up to the 200 and/or 50-day moving averages would be an explosive rally. But it has to overtake 10,000 first.
The EFA (I-fund) was up but held back a bit by a rally in the dollar. Here too the descending resistance is going to try to get in the way of any relief rally.
The resilient HYG High Yield Corporate Bond Fund moved back above the 50-day EMA on Friday but it remains below that flag formation which could be some provide overhead resistance. A move above that and surprisingly it will be close to all time highs again.
AGG (Bonds / F-fund) was off slightly, although the F-fund was flat, and the top of that channel has continued to hold as support. I suspect if stocks can rally again this week, and the yield curve steepens more like it did on Friday, this could move back within the red rising channel. That's a big if.
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