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Postive turnaround keeps bulls in charge for now

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Stocks opened lower on Tuesday but trended mostly higher all day, and a late spike helped push some red indices into the green, or at least to the flat line. The Dow ended with a moderate gain of 74-points while both the S& 500 and Nasdaq were virtually flat, but well off the early lows. Small caps and the transports led again.

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So the late action turned a poor day into a mixed but decent day, and despite the flat action in the S&P 500 and Nasdaq over the last couple of days, there were some signs of internal strength.

The small caps and Transports had big days again so we are seeing some rotation into some of the beaten down sectors, but depending on if you are looking at the glass as being half full or half empty, it could be telling us a couple of different things. One is that large cap, especially large cap tech, has been leading this market and perhaps money managers are thinking they have run their coarse and are looking for more value. On the other hand, with interest rates coming down, perhaps they are wanting to take on more risk? Either are good stories, but the former may be less sustainable.

The recent rally in stocks is being confirmed by a decline in the safety plays of gold and bonds, but both of these remain in strong up-trends above their 50-day EMA, so it's possible that the stocks are just giving us a head fake.

My theory is that we could see a ally into the FOMC meeting next week where they are pricing in a 90% chance of an interest rate cut. That's actually come down in recent days, but it's still 90%.

But once we get to that meeting, and maybe get a continued move high to test the old highs or even break above it, I think stocks become vulnerable again, and those safety trades may get a bounce off of support and get a second wind.

Who knows how it will actually play out, but looking at the charts, that's as good of a guess as any.

The S&P 500 (C-fund) turned a poor day into a flat day, and that's a positive for the bulls. That's a positive reversal day that tends to lead to more buying the following day, but the open gap did not get filled so it may still act as a lure. The argument against that would be that similar situation in June and July saw the rallies continue without filling those gaps - at least initially. They did eventually get filled a month or so later so we don't want to take our eyes off them complete, but in the interim, the old highs may be the lure.

The S-fund had a good day after another 1% plus day in the Russell 2000 small cap index, but also once again the midcaps held back our S-fund from having as good of a day, although +0.53% is nothing to sneeze at.

The Dow Transportation Index topped them all following up on Monday's 2% gain with another +1.54% gain yesterday. It is reaching for the recent highs, but that is well off the all-time highs made about a year ago when it hit 11,500.

The longer-term weekly chart of the Transports show a promising looking large bear flag, and it is now back above the 50-week EMA, although the week is not over and I suppose it could still fade back below it before the week is up.

The EFA (I-fund) also created a positive outside day while moving closer to that large open gap near 65.50, which may he a target.

AGG (bonds) was down sharply and it is now testing the bottom of that trading channel that we have been watching. The bottom of the channel and the 50-day EMA may be tough to get below, at least on a first attempt, since the trend has been so strong.

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

Tom Crowley

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