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Market Commentary

February 26, 2024
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After another strong open on Friday, stocks held onto some modest gains but we did see most of the indices drift lower and close near their lows of the day.  For the week, the TSP stock funds did well, although the S-fund did have a small weekly loss.  The I-fund came to life and led on the upside with the dollar down for the week.  Bonds were up big on Friday pushing the F-fund into positive territory for the week as well.

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Nvidia's earning were the highlight last week and by Thursday it turned what looked like a possible rough week for stocks into a very good week for most of the indices.  However, you know my obsession with open gaps and how they tend to get filled.  Thursday's gap up after Nvidia's earnings gives me something to worry about in the short term because, unless it's a rare "gap and go" development, open gaps tend to get filled sooner rather than later.  Friday's wishy washy close and slightly bearish candlestick may be leaning us in that direction.


Historically, the second half of February has been a weak period for stocks but so we have had enough catalysts, including Nvidia, this month to keep the rally going.  The weaker seasonal period has typically lasted into the first half of March before things really the bullish bias starts to perk up again and perhaps the March 20 Fed meeting will be the catalyst to make or break that tendency. 


However, as I often disclaim, for most of the year seasonality isn't generally a primary indicator.  February weakness has been one of the better indicators over the years, but not this year - at least so far with 4 trading days left in the month.

The Federal Reserve reduced their balance sheet by $52 billion last week.  This could be a headwind for stocks, or at the very least a possible catalyst for strength in the dollar, which can put pressure on stocks.  The balance sheet has been trending lower for over a year now so it's not always a perfect comparison, but I've noticed that stocks do seem to do better during the week, and the week after, the balance sheet is flat or rising. 


So the reduction of the balance sheet will test the dollar as its (UUP) recent pullback hovers just above the lower end of its trading channel and the 20-day EMA.  So stocks have done a good job this year of remaining buoyant despite this strength in the dollar, but that strength is likely why the I-fund has been lagging the S&P 500 by over 4% this year.


Yields were slammed lower on Friday giving the F-fund a lift, but the 10-year Treasury Yield chart still looks bullish (for yields, bearish for the F-fund) if the support holds and that bullish looking flag does what a bull flag in blue tends to do -- breakout out to the upside.

The economic calendar is pretty busy this week, but there's nothing on it like a jobs report or a CPI report.  We do get the PCE Prices report on Thursday - the Fed's favorite inflation indicator, but it's not generally a market mover unless it is completely out of whack with estimates.

Otherwise, it's two weeks until the next jobs report.  The next CPI report comes out on the 12th of March, and the next FOMC meeting / policy statement isn't until March 20th so, with earnings season winding down, it's going to be a little quiet for a while.  That could be a reason for profit taking OR, perhaps a time for the market to continue to climb the wall of worry. 

The S&P 500 (C-fund) has some overhead resistance issues, although there are some scenarios where that resistance could be a little higher (see the blue parallel trading channel.)  Otherwise it is right up against the top of the orange channel with a big open gap below 5000 that needs filling eventually.  I've been leery of this overly stretched chart in recent weeks, but it just keeps moving higher.


DWCPF (S-fund) is in a different situation as it is not as stretch, but rather it has built a good looking base since the December peak.  The question has been whether this good looking chart can make new highs if the overly overstretched S&P 500 does do some backing and filling.  The fact that the Fed is less likely to cut rates hurts the prospects of small stocks.


EFA (I-fund) finally broke out to new highs last week and it took some weakness in the dollar to do so.  Now, as I mentioned above, the dollar is testing support and if it holds, could be a headwind for the I-fund, but if support breaks on that UUP chart up top, then this could have more room to run.


BND (bonds / F-fund) rallied big on Friday but it has been in a down trend and trading below that 50-day EMA for several days now so it has more to prove before I can get interested in bonds. 


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

Tom Crowley

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