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Churning after indices get extended

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Stocks opened higher but we did get some selling about when the European markets started to close yesterday. The Dow held onto a modest 38-point gain while the other indies were mixed with the S&P 500 and Nasdaq closing slightly lower, and small caps and the Transports posting gains.

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The recent laggards were the leaders yesterday as the Russell 2000 small caps, the Dow Transportation Index, the Financials, and the Energy sector all had big days.

Like Friday, the S&P 500 closed the day about half-way between the high and the lows of the day, and that's kind of what we expected while indecision and a digestion of recent gains plays out.

We talked about this on Monday so I won't get too wordy, but we may be seeing some stretched indices so a little breather makes sense. We'll give the bulls the advantage as long as they can keep the S&P 500 above the old bear flag and 50-day EMA. A breakdown below those levels and you'll see the growling bears come back to life.

That said, the small caps and Transportation stocks have been lagging badly, and that opened the door for some rotation from money managers into those cheaper, less extended indexes, so perhaps sector picking starts to become more important. Unfortunately the TSP doesn't give us a whole lot of options.

The S&P 500 (C-fund) is doing some churning and burning after the big 2-week rally. Some sideways to slightly lower movement would be normal action in the short-term, similar to what we saw in those other blue boxes. 2940 looks like solid support being the bottom of the open gap and the top of the recent bear flag that did not break down. If it gets below that, there is another open gap that could come into play, and it moves back into the bear flag, and that would be bad news.

The small caps of the Russell 2000 had a big day gaining 1.27% on Monday. The problem is, while they tend to move in the same direction, our small cap S-fund does not track the Russell 2000 specifically.

Our S-fund has midcap stocks in it too as it is basically all U.S. stocks that are not in the S&P 500. The Midcap Index gained only 0.06% yesterday.

That means our S-fund landed somewhere in between. They haven't posted a price yet for Monday as of this writing, but I'll be curious which of these following two charts, the DWCPF -- which was up 0.30%, or the EMW Wilshire 4500 Index -- which was up 0.44%, will be closer to the gain we see in the S-fund for Monday.

The Dow Transportation Index repaired Friday's losses with a giant 2% gain on Monday. It's back above the 200-day EMA and that's good news for the bulls.

The yield on the 10-Year Treasury moved higher keeping the bounce off the September 3rd low going. Whether this will be a bottom, I don't know. I actually doubt it, but we could see the bounce move up to one or both of the next two obstacles in the 50-day EMA, then the top of the open gap near 1.85%.

AGG (bonds) was down yesterday on that rally in yields, and it is now firmly back in that rising trading channel after closing in it for three straight days. Being in a rising channel is bullish for bonds, and a test of the bottom of the channel or the 50-day EMA wouldn't be the worst thing to happen after the long rally in bonds.

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

Tom Crowley

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