TSP Talk Blog

After another hot CPI report, stocks opened on Friday with a barrage of selling. There was some stabilizing after the initial decline and into the final half hour of the day, but before heading into the weekend there was another push lower into the close. The Dow lost 880-points and it was another one of the those 2 -3% moves that we have come accustomed to seeing this year. Bonds were also down as yields moved up on the prospects of higher interest rates still to come.

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The year over year Consumer Price Index came it at +8.6% which are numbers we haven't seen in decades. This was even higher than the already lofty estimates and the market is still trying to price all of this in. It could force the Fed's hand to get more aggressive with rates.




The two-day FOMC meeting starts on Tuesday this week and the Fed was very likely planning another 0.50% interest rate hike but based on the recent data, rather than 0.50% perhaps we could be, or should be, looking at a hike of 0.75% or even 1.0% instead. The economy may not like it, but the stock market thinks a little further down the road. We could see stocks get a little cranky initially if they do go more than 0.50%, but it could also be the first step toward recovery / peak inflation and the stock market could show some signs of optimism. The probabilities are still heavily in favor of 0.50%, however, and that may not get the stock market excited as the consensus seems to be that the Fed is behind the curve as they have been since the "transitory" statements in 2021.

The Nasdaq has been hit particularly hard this year and right now only about 13% of stocks in the Nasdaq are above their 200-day averages. That's very extreme and only seen a few times in the last 15 years or more. I marked prior times that this number was near 15 or lower and while this extreme didn't always mark a low for the market, a low was getting pretty close. In 2008 - 2009 it took longer - maybe 6 months. I don't think the current market is in the same situation as 2008, but rather it is a new problem that we haven't dealt with since the 1970's and 80's.




In the short term, this week is one of those expiration weeks where options and futures contracts all expire on Friday so there tends to be some volatility and maybe some manipulation, but it has mostly a positive bias. Of course we're in the middle of very bearish activity so we may not see typical seasonal action, but you can see that historically - this chart goes back 30 years - there tends to be some buying, but the bears show back up shortly afterward.




Picking a low is tough and if you happen to do it right you would catch most, if all, of a major relief rally. On the other hand, trying to catch a falling knife can leave a mark if you don't catch it right. It's a volatile time and whatever you decide, you have to consider your tolerance for risk, and your financial situation before trying to do anything. Monday morning opens after a Friday like we just had can start off with high emotions, and it can get whippy.

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The S&P 500 (C-fund) chart remains in a downtrend and the action over the last two trading days killed any hope a bull flag breakout to the upside, which had been a possibility for several days before the breakdown. Normally the market doesn't give us so many opportunities to sell at the top of a range, which was the top of the bull flag, and that's why they tend to break to the upside, but the 50-day EMA proved to be too much resistance in a bear market, which in hindsight isn't too much of a surprise.




The Weekly S&P 500 chart is in a downtrend and may be pointing toward the 200-week moving average (blue), which could be a clean place for this bear market to find some support. It could take weeks or months to get there, or it could go straight down, you never know, but it could also pop back up to test the top of that red wedge in the interim as well.




The DWCPF (S-fund) was slammed to the tune of 3.23% on Friday, following Thursday's 2.5% loss. This one had a lot of overhead resistance including the 50-day EMA, the descending resistance, and the top of a large bear flag, but there was some hope from the bulls with that smaller bullish flag (blue dashed) that was forming within the bear flag. The bears won.




The EFA (I-fund) opened a large gap on the way down on Friday. The dollar was up big adding more pressure, and like the other charts it remains in a downtrend.




BND (bonds / F-fund) made new lows on Friday erasing all of the gains from the May bear market rally. Not ideal. It could find some support at a double bottom near 75, but I don't know if we would get anything more than a temporary relief rally if that happened, but you never know.




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

Tom Crowley



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