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Fed reiterate interest cuts coming

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Stocks opened higher on Wednesday, came off their morning highs, but the major indices stayed positive most of the day, and into the close. Small caps had a midday lull that took then info negative territory but closed with a minor gain, and the Transportation Index had a other bad day burying it further in some technical trouble. The Dow gained 77-points, and the Nasdaq closed at a new all-time high.

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The Fed basically reiterated that rate cuts are coming and yesterday's market applauded that. They recognized the strong jobs market but sited uncertainty with trade, global growth concerns, and low inflation as the reason for cutting. The question now is, how long can stocks rally on something it has known for months?

Right now the Fed Funds futures is pricing in a 100% chance of a rate cut at the end of July, with 73% saying a 0.25% cut, and 27% think it will be a 0.50% cut. Going out to the September 18 FOMC meeting, 55% believe they will cut 0.50% (between the two meetings) and 16% believe they will go to 0.75% total. 29% think one 0.25% cut in July will be it, with no cut in September.

Bottom line, everyone expects a cut in July with varying degrees of basis points, and it all seems to be priced into stocks already, so there's not much room for them to be wrong. But with last December's rate hike market tantrum firmly in their minds, the Fed is unlikely to do anything but give investors the cut they expect, whether we need it or not.

The S&P 500 hit 3000 for the first time intraday on Wednesday, although it closed 7-points below it at 2993. It's psychological of course, so let's see what happened when the S&P 500 hit 2000 and 1000.

The S&P 500 crossed the 2000 mark back in the summer of 2014. It bounced back and forth, above and below it for several weeks, getting as high as 1% above it in September that year, before it rolled over in the fall. Not great.

However in early 1998, after a long consolidation just below it, the S&P 500 cut through 1000 and took off from there for two months with barely a wrinkle.

We'll get another round of Federal Reserve Chair Powell testimony today - this time from the Senate.

The S&P 500 (C-fund) rallied hard out of the gate on Wednesday, made a new high, cleared the 3000 mark, then back off slightly. There is some rising resistance near yesterday's highs, but it is rising and that gives the index room if it wants to continue higher. There are a lot of skeptics of this breakout, and that actually helps the market move higher, but not for the best reason. Short-covering buying is not a vote of confidence but it still sends the price of stocks higher. Once again it has come a long way in a short amount of time and it may need to exhale soon.

The DWCPF (S-fund) was up slightly after giving back some decent early gains. The Russell 2000 small cap index is still in correction mode, or 10% off its all-time highs. There are a lot of small banks in the Russell, and that may be the issue since financials have been struggling and were down yesterday.

The Dow Transportation Index was down again and falling further below that 200-day EMA. It is now 11% off its all-time highs so we're seeing a negative divergence from this economically sensitive index and it's not confirm the new highs in the big three (Dow, S&P, and Nasdaq). Does that matter? In the past it has but in a service driven economy, maybe not as much as it used to.

The I-fund was up, bouncing back above the support line that it fell below on Tuesday. The falling dollar was a main catalyst as usual, but ...

... the dollar is back in its rising trading channel and looks to be just backing and filling an open gap.

We saw commodities rise on the weakness in the dollar including gold, and as we have been talking about, oil and copper, which bucked their negative trends by rallying strongly yesterday. So much for the bear flag on the oil chart, and the head and shoulders on the copper chart looks to be testing the middle of the head, which is not uncommon.

AGG (Bonds / F-fund) has been moving sideways for a few days, since breaking below its rising channel. It had every reason to pullback, but it hasn't yet. The Fed reiterated the interest rate cuts so yields have remained stubbornly low. Yesterday I suggested that the breakdown may mean the bond market is not so certain about the Fed cutting, but it sure sounded like Powell was certain yesterday.

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:
Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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