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TSP Talk - Is the economy too strong for the Fed?

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Last week the stock market pulled back early in the week but moved higher heading into the holiday weekend. Now we started a new week, a new month, and a new quarter on April 1st and, as the market loves to do, it took my repeated reminders that early April tends to be strong, and threw that on its head. It wasn't a terrible day with the Nasdaq closing positive and the S&P down just modestly, but the small caps, which had been leading recently, got slapped down on a day that seasonality followers might have expected something better.

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The ISM Manufacturing report came in hotter than expected and that turned what was looking like a strong upside open for the stock market, into a flat and eventual negative day for stocks. Later in the day the Atlanta Fed raised their GDP estimate for the 1st quarter to +2.8%, which is a lot stronger than earlier estimates. This combination sent yields and the dollar sharply higher and that put pressure on stocks, especially the interest rate sensitive small caps, which had been performing rather well lately.

The economic data continues to be stronger than expected, and inflation has been a little hotter than the Fed would like to see so they have a lot to think about over the next couple of months before they are expected to cut interest rates in June. Two months is an eternity for the stock market and anything can happen in the interim, but investors may start to get nervous if they perceive any shift in the Fed's dovish outlook to cut rates several times before the end of the year.

So the market blinked a little yesterday on this data but the repeated claims by pundits that the market is "due for a breather" is everywhere, and we know how much it likes to frustrate those who think they know what's coming.

Here is the jump in the 10-year Treasury Yield, and that inverted head and shoulders pattern that we've been highlighting is playing out as if coming out of a technical analysis text book. Perhaps it chops around in that right shoulder a while longer, like it did the left, but these inverted H&S patterns do tend to break to the upside. So what would cause that? Well, we do have a jobs report coming out on Friday so circle that day on your calendar.

The dollar has also been very hot and that put pressure prices in general and particularly the I-fund. The EFA index, which tracks the I-fund, was down moderately yesterday while London, Germany, and France's markets were all up yesterday. Japan did pull back.

EFA (I-fund) is flirting with its 11-day average support line again. This support is probably not sustainable for any length of time, but it's working for now. The 20-day average (not shown) is near 79 right now, and the 30-day is 78.50. If any one of those gets tested it would still remain in the trading range that it has been in for the last month, and that cup and handle formation actually looks more likely to break upward, than down.

Small caps can feel that heat of these higher yields and stronger dollar as smaller companies tend to depend more on loans to keep the growth going, even if the economy is pulling its weight. The DWCPF (S-fund) was down sharply yesterday but the chart looks fine, although a pullback to the breakout line is very possible, or even a retracement of some of those breakout candles in the red box could be in the cards while keeping the chart above its 30-day EMA and remaining in its bullish trend. But when will the market ever satisfy the "due for a breather" investors?

The economically sensitive, market leading, Dow Transportation Index has been performing well but right now it is stalling again against the top of its recent range. A longer term view would show that this is actually part of a big bull flag, so there is a good chance that this breaks out above that resistance line, but it is a flag and it could also pullback to test the bottom of the flag again before it does so.

Earnings season starts up again in about two weeks so the market will have some catalysts, but in the meantime its the economic data reports that will get investors guessing which way the Fed is leaning, and Friday's jobs report is the next big one, although today there is a JOLTS report which gives us some info on job openings, which is also a tell.

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Good luck to everyone in April!

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The S&P 500 (C-fund) was down modestly yesterday but the trend seems to be holding up just fine for now. The negative reversal on Thursday tends to be followed up with some selling, and we got it, so for now it's not much more than that. As I have been saying, as long as that 15-day EMA in green is holding, the bulls will be in charge. If that breaks, then we could finally get an attempted test of the elusive 50-day EMA.

BND (Bonds / F-fund) had an ugly day with that surge in yields yesterday. It broke a few layers of support and looks suspect, and if that 10-year yield chart up top does break to the upside, the F-fund could be toast for a while. Toast is bad.

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

Tom Crowley

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S&P500 (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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