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TSP Talk: Big rebound may trigger low, but there could be another scare

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Stocks bounce back big on Turnaround Tuesday, and not only did they rebound, the yield on the 10-year Treasury also had a big positive reversal day that may be suggesting a capitulation low for yields - and a peak for bonds. The action was great and it certainly changed investor sentiment, but it is not necessarily a low in stocks yet. The Dow gained 550-points and the small caps led with a gain of over 3% in the Russell 2000, and nearly 3% for the S-fund. The dollar was up again putting some pressure to the I-fund.

Daily TSP Funds Return

It was a great day for stocks as far as returns go, but I am going to tread lightly regarding what yesterday meant. It wouldn't be the first time that we saw a big snap back rally in a downtrend, only to have it flip back over in the following days. I'd love to able to say that the downside is done, everything is rosy again, and off to new highs we go, but it may not be that easy.

On one hand, the yields reversed nicely on Tuesday, and that may have been a sigh of relief from those of us that have been concerned about the strange weakness in yields in an economy that is supposed to be recovering strongly.

However, as you can see above, the yield made a new low in the morning and stocks were up sharply while that was going on as well, so it wasn't totally a rally in yields that flipped stocks back up, although the reversal perhaps helped move the rally in stocks into another gear. It may have just been an oversold bounce for stocks.

My concern is about the gap filling on the S&P 500, and the possibility of another shakeout coming, especially in small caps where we've seen this happen before.

First, here's that open gap getting filled on the S&P 500. Good stuff, but as we talked about in Tuesday's commentary, we knew that was likely going to happen sooner rather than later, but now that it's filled, what's next?

Speaking of Tuesday's commentary, I apologize that it wasn't posted until about 2 hours after the opening bell yesterday. It wasn't until someone mentioned to me that I knew it hadn't been uploaded. I almost always post a commentary so if the opening bell rings and it's not updated, just shoot me an email or PM in the forum to let me know that it didn't get uploaded. Sometimes I do all of the work to put it together, and just forget to upload it. Thanks!

Where was I... The small caps. The Russell 2000 has certainly had its share of large one or two day rallies that quickly failed and another sell off was on the heals of the bounce. Prior instances saw that second push lower make a new low and some didn't make a new low, but just be on the lookout for another sell off in the coming days, just to keep us guessing.

And you may recall the dramatic selling in March of 2020. Those one day rallies in there periodically were monsters, percentage-wise, and until March 23, all of them flipped right back over.

We are certainly not in the same type of market environment as we were in March of 2020, but you never know how far this new concern over the Delta variant will be pushed.

The advance / decline volume yesterday was about 9 to 1 in favor of advancing, and if we can get another day like that within the next week, it would be a good sign of a low.

I talked about the situation with the S&P 500 (C-fund) above with the gap being filled. The bounce off the 50-day EMA was a very bullish move but a reminder that in early May we saw a similar bounce off the 50-day EMA, only to be retested a few days later.

The DWCPF (S-fund) had a monster move but it closed below that 50-day EMA again, which tends to be tough to get back above on the first attempt. Maybe it will be different this time? I hope I'm wrong but I won't surprise me to see another scare day for the bulls before the pullback is over, and the 50-day EMA can be the cause of that. If we can get by today without a major pullback, and an eventual close above the 50-EMA, I'd feel a lot better.

The EFA / I-fund lagged yesterday because of another rally in the dollar, and may try to play catch up today, but this chart looks bad and at this point a move back up to fill those open gaps (red) could be a gift, and may be a gift that would have to be sold.

The Dow Transportation Index gained 2% but technically it has some issues as it sits below that old support from the 100-day EMA (orange line) and that could now act as resistance. It is in a downtrend, but it looks sort of like a falling wedge, and they do tend to break to the upside, so it may not be all bad news here.

The BND (bonds / F-fund) looks very toppy here after the negative reversal day that filled that open gap from back in early January. There is another open gap down below 86.50, and if that gets filled, it could be the beginning of the end of the rally in bonds and the F-fund.

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

Tom Crowley

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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