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Market Commentary

October 22, 2020
 
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It was a very choppy day for stocks on Wednesday as the indices alternated between gains and losses all day, with a familiar late sell off to end the day.  The indices closed near their lows of the day although the losses were modest. The problem is that the charts are starting to deteriorate some, although they're not dead yet.  The Dow lost 98-points, while small caps lagged, and bonds were down again, testing their recent lows.

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Investors seem focused on this stimulus deal but I'm more inclined to think that traders are enjoying the volatility and going with it, rather than the market depending on the stimulus.  Does the economy need the stimulus?  Probably, and we know a deal will eventually be made, but I just never really saw it happening before the election.  Neither side in Washington wants the other to be able to claim a victory, so the stalemate continues.  After the election, they probably won't care as much about saving face. They'll either be in their position for a few more years, or not. 

So, deal or no deal, traders like the action, but from what I hear investors aren't really putting a lot of new money to work before the election.  There's not a lot of selling going on either, so it's most likely traders going back and forth causing the choppy action, with the edge going to the downside because of a lack of new money coming in.

Meanwhile, the stimulus negotiation are also causing the dollar to bounce around, but trend lower, and yesterday it did break down from that head and shoulders pattern that we've been watching.  While that has caused the price of many commodities to go higher like the metals (gold, silver copper, etc.), soybeans, wheat, and even bitcoin, it didn't work on stocks yesterday - at least by the close.  We did see another early rally fail.

          


That makes for an interesting point.  While stocks have been moving counter to the dollar in recent months, it hasn't been on a day to day basis.  The trends are moving counter to each other, but as you see above in those blue boxes, the dollar was a little more volatile in the short-term than the S&P 500, although they stayed on the same page direction-wise.  So yesterday's breakdown in the dollar didn't send stocks rallying -- at least not yet.  The dollar is falling in anticipation of a stimulus deal being done while stocks are playing more fear games.

Tesla, Chipolte, Whirlpool, and CSX were some of the headliners reporting earnings after the bell yesterday, with 3 of the 4 up in afterhours trading, but none are big market movers, although Tesla does have a larger impact on the Nasdaq.  Next week will be the main event for earnings with many of the FANG type stocks reporting.

Update: The futures moved down sharply on Wednesday night on news of possible election interference from Iran and Russia. Obviously a serious matter, but the sell off was probably a knee-jerk reaction. As I have said before, I don't think Wall Street cares too much about who wins the election. They're prepared for either party to win, but they may not like the chaos that follows the election, and interference would exasperate that. I could be wrong, but right now I don't think it's a reason for stocks to sell off, so any overreaction could be reversed quickly.


The S&P 500 (C-fund) continues to trade in a descending trading channel off the recent peak.  This is typical inverted head and shoulders action, but the repeated closes at the lows near the key support line is a bit concerning.  I like the patterns - even the descending channel which resembles a handle from a cup and handle formation, but I don't like that buyers aren't stepping up at support.  As I mentioned above, that's likely because of a lack of new money coming into the market this close to the election, rather than an all out selling.

         


I will leave this up while this inverted H&S pattern continues to play out.

                        

The DWCPF (S-fund) had a bad day and 5 ugly candlesticks in six days tells us that risk may be coming off the table for some investors, after small caps led on this last leg up.  I marked a few possible downside targets with the nearest being just a few points below yesterday's close.

        

         
The Dow Transportation Index was down sharply as it pulled back from that flat top formation.  A key rail company CSX was trading up 4% in afterhours trading and should be a boost today for the Transports.  We'll see if it will be enough to help it get past that stubborn 12,000 resistance area, just as 11,000 has acted as stubborn support recently.

         


The EFA was down sharply (-0.48%), and with the dollar also down, I wasn't surprised to see the I-fund get priced better than that at -0.09%.

        


BND (F-fund) was down again and that's 5 days in a row, and it is now testing the early October lows.  Obviously it has two choices now - break down or bounce off support.

        


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 tomorrow.

Tom Crowley


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