TSP Talk Blog

The Dow didn't blink but the broader indices took a day off posting modest losses to start August creating what could be a "new month, new direction" situation. It was certainly nothing serious but the 10-year Treasury Yield moved above 4% and the dollar rallied again putting pressure on stocks and, to make matters worse, after the bell Fitch Ratings downgraded the United States’ long-term foreign currency issuer default rating to AA+ from AAA.

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The downgrade may have come as a surprise but with our national debt now over $32 trillion and the government running continuous deficits pushing the debt to GDP ratio up to 123%, something was going to give. By comparison the debt to GDP ratio was 57% in 2000. Fitch "expected fiscal deterioration over the next three years" and said repeated debt ceiling issues and "political standoffs and last-minute resolutions have eroded confidence in fiscal management."

The futures were down after hours putting a damper some decent earnings reported after the bell, but the market will likely shake this off quickly like everything else lately, although maybe we needed to be put in the corner for a little while to think about the situation we've put ourselves in over the last couple of decades.

The news sort of makes any of yesterday's rear-view mirror analysis seem trivial but before the announcement we saw the 10-year yield move back above 4%, an area that has proven to be troublesome for the stock market at times as it gives investor a solid alternative to stocks.



The dollar also moved up and the rebound off the July lows continued. We still have a series of lower highs and lower lows so the test may not come until it gets up to the early July highs.

With Apple and Amazon reporting earnings after the bell on Thursday, and Friday's release of the July jobs report, we have some catalysts, but until then, maybe we're just due for a break during a seasonal pullback after a great run for the stock market.



Chart provided courtesy of www.sentimentrader.com

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The S&P 500 (C-fund) was down slightly and there's not much to take from that. We know, even in the best of bull markets, stocks can not go up every day, although the Dow is giving that theory a run for its money posting its 16th gain in 17 trading days. If the 4550 area breaks on this chart, then the bears may start to perk up.




DWCPF (S-fund) was down but buyers were showing up as soon as it fell and it closed near the highs of the day. After the bell the downgrade pushed the small caps futures down about 0.50% but that's nothing considering the recent gains. If it falls below 1850 then maybe we'll see some more serious selling.




EFA (I-fund) took a hard hit yesterday and once again the dollar rallied pushing it further up off the July lows. The dollar is approaching a confluence of resistance and that could make or break that chart, and of course the I-fund is likely to move in the opposite direction.




BND (bonds / F-fund) was down sharply with yields rallying. The long consolidation below the moving averages continues but that 200-day MA (orange) is trying to provide some support. If that and the July lows don't hold, it could get ugly here.




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

Tom Crowley



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