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TSP Talk: Bulls thwart the bears' attempt to sell another rally

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Stocks were flat to mostly higher yesterday after a volatile trading session. They opened to the upside but the bears showed up for a while and put some heavy pressure on. But a late rally pushed the indices back into positive territory by the close. The Dow led and closed with a decent gain of 262-points. We saw some gaps get filled and as we've talked about, they did act as support yesterday. Bonds were up, as was the dollar.

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As our TSP Talk Plus subscribers can attest, I've been a little obsessed with the seasonality charts recently, particularly because August and September are historically the worst performing months of the year. August had some scary moments but it turned out to be a very good month for stocks. September is actually worse over the last 30 years, and it did get off to a rough start.

This week is actually one of the better weeks in September according to the chart, so getting a little bounce back from last week's losses makes sense. But the market faces a headwind starting this coming Friday and all of next week. Why would that be?

Chart provided courtesy of www.sentimentrader.com



Well, congress comes back from their summer recess this time in September so is this calendar a coincident or a direct reason for the market's weakness during the 3rd and fourth weeks of September? August is the only month that congress is not in session at all so this is the first time that the House will get together since July 30.




There is a proposal from House Democrats to raise the Corporate Tax Rate from 21% to 26.5%, and of course they've also shown interest in raising the capital gains tax, and these are the kind of things that can get Wall Street rumbling and could cause some volatility as it gets negotiated when they get back in session. Of course congress also implements spending bills which Wall Street really seems to like.

I mentioned this before, but I have early October circled on my calendar as the debt ceiling limit gets reached again. There is the possibility of a government shutdown and a spending halt, and obviously that wouldn't help stocks. However, President Biden wants to suspend the debt ceiling and Republicans likely wouldn't go for that unless they were forced to - tacked onto a different bill, etc.

According to Politico, "Biden wants to force Republicans to vote on the debt ceiling. The White House, sources say, wants to include a hike in a bill that would require GOP votes to pass.

"The administration wants to include a suspension of the debt limit — a legal cap on how much the U.S. can borrow — in a continuing resolution to fund the government. Such a bill, which Congress is expected to consider as early as this month, would require 60 votes to pass in the Senate, meaning at least 10 Republicans would need to vote to advance the measure
."

The real question will be whether the tiff makes it impossible for the two sides to come to any sort of deal, and a shutdown would certainly be a possibility. However that gets resolved, it could be a market mover for Wall Street, although I think Americans have become numb to the amount of money the country spends and owes.

We get the August CPI report (consumer price index) today and inflation being a concern of late, it becomes an important piece of data. Here are the estimates:





With bonds yields continuing to stay fairly low, the bond market really doesn't seem to be all that concerned with inflation, and the bond market is generally considered smart money, so why are we all concerned about it? Well because inflation can be disastrous to the stock market so any whiff of it does bring with it volatility.





The S&P 500 (C-fund) traded in a fairly wide range on Monday, but closed somewhere in the middle of that range as the bears sold the opening rally, and the bulls bought the midday sell off. What do you know - the open gap was filled and it acted as support. That's typical on the first test, but it doesn't necessarily mean the gap will hold going forward, but clearly the bulls were watching that 4450 area, like we were. The question about whether we get the monthly test of the 50-day EMA remains.




The DWCPF (S-fund) lagged a bit gaining 0.05% but that was good come back from the morning lows, and those lows did fill the first open gap that we've been watching. There is another gap near 2190 that is still in the picture.




The EFA (EAFE Index / I-fund) had a big day, despite the dollar holding firm. There is a small overhead gap that may be getting some attention, but all of the larger gaps are still down below. It did close back above that 81.50 area negating the failed breakout.




The BND (bonds / F-fund) was up modestly as yields dipped. This continues to trade within the wedge-like formation and above the 50-day EMA.




The Dow Transportation Index was up but the chart still looks suspect as it holds below the moving averages and the pennant formation.




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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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