TSP Talk Blog

Thursday was a day of digestion for stocks after the explosive Fed driven rally on Wednesday. We saw the Dow shed about 200 of Wednesday's 700+ point gain. The Nasdaq held up well, but was basically flat - as the S&P 500 and small caps. The I-fund led again after the dollar broke down sharply as the market adjusts to the less hawkish Fed. Yields also broke down giving the F fund a very healthy gain.

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Lots of travel and time consuming personal business for me this week. So sorry. I watched the opening bell yesterday and stuck around until the TSP trading deadline enough to see the early rally fade when a little profit taking kicked in. After another 5+ hours on the road I see that in indices closed mixed with no real advancement, but there's nothing wrong with that after what we saw on Wednesday.

At this point my mostly bearish stance is on weaker legs and I will probably spend a lot of time this weekend digging in to see if I can figure things out.

Buying the dips had been working for the bulls since the October lows but it has been fairly volatile so it was hard for the bulls or the bears to get comfortable because we all knew a big rally or sell off could be right around the corner. Now we see a bit of a pivot fro the Fed and that may have changed things.

The large bearish flags are getting extended making it look less like a flag and more like a "V" bottom, but it's a little too early to call as the S&P 500 chart, and other charts, are still flirting with their 200-day moving averages, which tend to be pivot points, so we could see the bear market officially (based on my indicators) turn into a bull market, or flip over and kill the bull market rally. That happened in March and August but this rally now has some fundamentals backing it.

Then there's the trickery that is often involved where the big money tries to push the market around to get us dumb money leaning the wrong way.

Bottom line, the Fed thinks they are getting a handle on inflation but they are still concerned and still raising interest rates - although Powell said it could be at a slower pace. As they raise interest rates, it impacts the economy, which is their intention as that will help with inflation.

The recent GDP estimates had been fairly robust, but just yesterday the Atlanta Fed lowered their 4th quarter estimate quite a bit.

The Atlanta Fed's GDP Now website decreased their Fourth-Quarter GDP Growth Estimate:

On December 1, the GDPNow model estimate for real GDP growth in the fourth quarter of 2022 is 2.8 percent, down from 4.3 percent on November 23.

"The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 2.8 percent on December 1, down from 4.3 percent on November 23. After recent releases from the US Census Bureau, the US Bureau of Economic Analysis, and the Institute for Supply Management, a decrease in the nowcast of fourth-quarter real personal consumption expenditures growth from 4.8 percent to 3.2 percent was slightly offset by an increase in the nowcast of fourth-quarter gross private domestic investment growth from 1.0 percent to 2.0 percent. In addition, the nowcast of the contribution of the change in real net exports to fourth-quarter real GDP growth decreased from 0.64 percentage points to 0.16 percentage points."

Source: https://www.atlantafed.org/cqer/research/gdpnow.aspx


So, that's the battle, easing inflation with higher interest rates vs. the economic slowdown it will cause.

We get the November jobs report this morning (Friday) and estimates are looking for a gain 200,000 jobs. Not exactly recession type numbers but that's about 15% less than last month.

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I will be back in the office next week and doing my homework over the weekend to try to get a better grasp of what Friday's rally really means for the rest of the year. I'll just post the S&P 500 (C-fund) chart to illustrate some of what I am looking at.

We can see how long that "bear flag" has gotten, making it look more like a "V" bottom now than a flag. It is above both the 200-day EMA and the 200-day Simple average (orange). The overhead gap was filled this week and it closed within that gap yesterday. There is also a fairly large gap still open near 3800. History suggests that if we do get a recession next year, the lows should not be in yet so that gap could get filled, although it could take a while. Meanwhile we head into the strongest month of the year historically with the bulls seemingly in charge. Is this what "they" want us thinking?




Let me add this chart of the Yield on the 10-year Treasury and the dollar, which both broke down on Thursday.




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Thanks so much for reading. Have a great weekend

Tom Crowley



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