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TSP Talk: Stocks explode higher

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Stocks exploded higher on Wednesday and the headlines suggest some stronger than expected economic data, but bond yields gave up a big early gain so it didn't seem overly related to the data. It could have been some old fashioned FOMO (fear of missing out), or possibly triggered by some Fed comments, but that Fed talk didn't sound all that encouraging, so it was more of a head scratcher rally to me. The Dow gained 416-points, about 100-points off the highs as we did see some selling late into the close, but all of the indices closed with strong gains. The dollar and bonds were up.

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Considering what we are seeing out there in the economy with inflation, the housing market starting to slow, interest rates moving higher, increases in corporate tax rates, etc., stocks are putting on a heck of a show as the indices climb that wall off worry.

The most recent move higher in stocks was based on the interpretation of last week's FOMC meeting that the Fed is pivoting to a more dovish outlook, but the Fed themselves beg to differ. There was a headline on yesterday that said, "Fed officials push back against bulls who want to believe central bank will pivot to rate cuts." That doesn't sound too good.

So perhaps the action we are seeing lately has been the market's attempt to get those who have been afraid to buy, in the game, but you know how that goes. If you're following the herd, you better make sure they are not headed for a cliff. The people out front can see what's coming and may steer themselves away just before going over, but the followers may not be fast enough to make an adjustment.

I hate being overly bearish, especially when stocks are rallying, but my charts and indicators tell me that we are still in a bear market, barely, and that means selling the rips, and we've had a nice rip. At some point those indicators will flicker to the bull market side, and unfortunately it could take a big rally to get there, and I could easily miss a lot of it, but in a bull market I'll be back in buy the dip mode when I get a buy signal, and I will feel better about buying at that point, even if it's a little late to the party.

The problem is, you can get faked out by premature bull market signals and that happened to me in late March / early April and stocks rolled over shortly after that. So it's not an exact science and we do the best we can we the information we have.

This chart from 2008 shows a similar rally that went from the lows of March 2008 and went into May, so it lasted quite a while, and eventually recaptured the 200-day EMA. The problem was...

... it didn't go any further and we saw new lows by July after the fake out.

So bear market rallies make you money but you can't let your guard down too soon.

The yield on the 10-year Treasury shot up early on that stronger than expected PMI report yesterday morning, and it took the yield back up near 2.85%, but from there it flipped over again and closed back on that neckline of the head and shoulders pattern. As I talked about yesterday, that neckline normally holds on an H&S pattern, but that open gap near 2.9% was a big enough draw to pull it back up above it.

On the flip side, bond prices (F-fund) were up with yields turning down in afternoon trading, and the inverted head and shoulders pattern did the opposite of what we saw in the yield chart.

Why would yields be falling when the Fed is raising rates? Because the high inflation is causing the Fed rate to hike rates and that is hurting the economy, and yields tend to fall when the economy is weakening, but the Fed seems determined to keep raising.

The price of oil fell sharply yesterday as it prices in the weakening economic data, and that has been lowering gasoline prices for us. All good. There is a lot of support near $90 so we'll have to see how this plays out.

On Friday we'll get the July jobs report. Estimates are looking for a gain of 250,000 jobs and an unemployment rate of 3.6%.

Sorry for the erratic updating of the share prices and the AutoTracker lately. The TSP has been incredibly flaky about when they post them each day and I am stuck until they do so. Some days, rarely, they post them at 8PM (an hour later than before the website was updated), but more often it is later than that, and sometimes not until early the next morning. It has me checking all night, and it's getting frustrating. So, bear with us. Hopefully they will figure something out to get back to more consistency.

The S&P 500 (C-fund) moved to another two-month high as it approaches the 200-day EMA and the top of that previous consolidation area from early June. There's a lot of good developments here but it is close to make or break time for the bear market rally.

The DWCPF (S-fund) has surpassed a lot of levels of resistance but we see a rising wedge pattern now, which is similar to an "F" flag like we saw in early June, and often they break down. The 200-day EMA is still quite a way above the current level with small caps lagging the large caps all year, so that June high may be the area to watch to see if the sellers come back in.

EFA (I-fund) continues to move counter to the dollar and yesterday an early rally in the dollar reversed down helping the I-fund to close near the highs of the day, but you can see that it fell below the rising channel, which may be considered a rising wedge. Rising wedges tend to break down as we mentioned with the S-fund chart analysis.

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

Tom Crowley

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  1. FireWeatherMet's Avatar
    Excellent analogy of the initial 2008 downturn...I was going to add that to my Account Talk, but I am drinking a bit too much wine this evening...will maybe try tomorrow.
    All I was going to say was that the initial 2008 drop was closer to 20% while this years was over 30%.

    And there were a few very big reasons we took another turn downward in July 2008...namely Fannie and Freddie collapsing.
    If that wouldn't have happened...and the banks weren't about to fail...maybe we would have went back up to new highs in late 2008 instead of free-falling?

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