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Dow up, other indices flat after another reversal

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Cyclical stocks like Caterpillar and United Tech led the way yesterday helping the Dow to a strong gain of 165-points, but that was almost 200-points off the early highs so we continue to see a pattern of early strength and late weakness in stocks. The other indices were basically flat on the day with the S&P 500 giving up almost all of its early 1% gain.
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Investors and traders seem to be trying to figure things out at this point - I guess they always are. We just had a correction off a major rally to start the year, after a strong 2017. Earnings have been good and the corporate tax cuts have certainly added to their future earnings projections. We have a strengthening economy, but that comes with potential inflationary concerns, and a need for higher interest rates and higher bond yields.

The market has fed off of cheap money for almost a decade and that may not be the case going forward, and this is where the investors have to decide which way the wind will blow taking all of this into account. That's the big picture and the longer-term investors are more interested in that.

In the short-term the technical analysis may determine what happens in the coming days and weeks. We could see a bounce from here and form a higher low. We could see a test the recent lows. They could hold, or they could fail. The chartists and market timers will look at that, rather than the big picture. The technical battle right now is between the resistance of the 50-day EMAs vs. some bull flags.

The S&P 500 / C-fund seems to be creating a bull flag, but it's an odd one in that we've seen negative reversals in each of the last 4 days. Negative reversals tend to mean short-term weakness going forward, but it doesn't look out more than a day or two - just a short-term indication. So far the negative reversals have produced negative action, but not necessarily any meaningful negative returns, if that makes sense. The S&P closed below the important 50-day EMA for a second straight day.

The small caps / S-fund chart also has a weird looking bull flag formed so that makes the short-term a little iffy. Bull flags tend to break to the upside but the negative reversals suggest potentially more short-term downside.

The Transportation Index continues to struggle below the 50-day EMA having closed below it almost the entire month of February.

The EAFE Index / I-fund has also remained pinned below the 50-day EMA and there is a large open gap below that may need filled, but it too has a possible bull flag forming.

The High Yield Corporate Bond Fund continues to dance between the 50 and 200-day EMAs. Like stocks, the early gains here were given up and it closed back on the 200-day EMA. That's another - say it with me - negative reversal.

The AGG (bonds / F-fund) is what it is. It's in a downtrend and in some trouble. There doesn't seem to be a technical reason to buy bonds now, unless it is a play on being oversold and investors want a little more safety if stocks sell off. But I would prefer to see the downtrend break to the upside before considering bonds.

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Thanks for reading. Have a great weekend!

Tom Crowley

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