Post election blast off
by
, 11-08-2018 at 01:15 AM (955 Views)
Stocks soared off the results of the midterm elections, and while most expected some kind of reaction, not many expected anything of the magnitude we saw. The Dow gained 545-points on the day, and it gapped up above that key 200-day EMA resistance that we have been watching. The gains were broad across most major indices and it seemed to catch many by surprise, including myself.
The reaction to the midterm elections was probably a lot more bullish than most could have expected but as we had said a couple of weeks ago when things were a lot worse, that snap back rallies can be explosive, and it puts investors back in a comfortable zone, but is that the correct state of mind for this market?
Daily TSP Funds Return
I posted these charts on Monday and yesterday's rally plays right into the game plan of the 2007 top. First is the 2007 chart and on Monday we had just hit that letter "D" area off the lows just below the 50-week average. We thought if it played out then we could see a rally up to the "E" area that would become a lower high.
And here is what we have now. I'm sure it won't be perfect even if it does rhyme a little, but if we rally for another few days or into next week, watch that 2850 area which would mirror the letter "E" peak above.
The battle now will be between the FOMO people (fear of missing out) and the sellers of rallies. On October 29 I said that explosive rallies off the lows are not easy to sell because of a new bullish mind set, but it was probably the wise move. I said, "When you see a rally of 10-15% off the lows, your mindset isn't thinking "sell this." But being below the key moving averages, as they were in this chart, it can mean that is exactly what you need to do."
So, here's the rally rally. Are we thinking "sell this?"
Obviously I have not learned from the 2016 election where I was on the sidelines "just in case" something unusual happened. Well, we all know stocks soared after that and it was tough to get a good opportunity to get in without chasing. 14 months later we got the first real correction in that rally. Is this the same situation or is this a short-term emotional pop with people trying to relive the 2016 rally?
There is a 2-day Fed meeting wrapping up today with a policy decision that is not expected to include an interest rate hike. It's the December meeting when most expect the next hike to be announced. But they could say something that could stimulate the market, and with a lot of gains to protect, you never know if we could see some quick profit taking.
The S&P 500 / C-fund popped above the 200-day EMA with a gap up open, and the rally was relentless all day with the S&P making it all the way through the 50-day EMA before the day was done. We now have two open gaps below and a narrow rising channel. How long can it last? That's the question. Just a couple of weeks ago we were talking about selling rallies, and then you get a week like the one we just had and it doesn't feel like a good move. But is it?
The DWCPF (S-fund) rallied 1.7% yesterday but this one remains below its 50 and 200-day EMAs. It has been a great move off the lows, but as we keep saying, bear market rallies can be explosive. We'll have to see if this has enough left in the gas tank to get back above those resistance levels.
The EFA (EAFE Index / I-fund) is back up to the bottom of the trading channel it fell out of in October. This one has been in a bear market for quite some time so it is make or break time for the I-fund.
The yield on the 10-Year Treasury Note is at levels we haven't hit since 2011. The double bottom in this monthly chart shows a major change in character in the bond market.
Of course bond prices move counter to yields so the AGG (bonds / F-fund) is breaking down from a bear flag, although its short-term double bottom has been trying to hold as support.
The High Yield Corporate Bond Fund came along for the ride yesterday, which is always a plus for stocks.
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Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
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