TSP Talk Blog

The Dow gained 60-points on the day yesterday, snapping a 6-day losing streak, but that relatively flat close came after a 322-point swing from the lows to highs, and back again. The other major indices were also fairly flat on the day after weathering the day's volatility. The 10-Year Treasury Yield closed above 3% for the first time in a long time.

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We have a bit of a battle going on here because stocks are not rallying on what have been tremendous earnings reports overall, but instead we're seeing some sell the news reactions as investors don't seem all that impressed. Is it the 3% Treasury yield?

Whatever it is, in strong markets like 2017, stocks seem to rally on good or bad news as investors see everything as the glass being half full. In more bearish markets stocks can't seem to rally on good news, and perhaps that's the environment we're in right now.

We had about a year and a half of gains since the '16 election as investors priced in every piece of potential good news - mostly related to the tax cuts. Now we're seeing the fruit on the trees and perhaps investors feel like it is mostly priced.

For about 9 years interest rates were virtually 0% so there was really nowhere else to put your money. Now that interest rates are creeping up, why not take profits in stocks? Just how long it takes for a 18 month rally to digest those gains remains to be seen, and once that is determined, we'll see investors jump back in.

The 10-Year Treasury Yield made new highs in each of the last 4 trading days and yesterday it closed above 3% for the first time in several years, 3.02%. At this point it's a question of whether investors want to lock in these rates in lieu of the volatility in stocks. The fact that the world didn't come to an end on the 3% close may be a bullish sign, but what happens if it keeps going and reaches toward 3.25%, 3.5%, or even 4%?




Facebook posted fantastic earnings after the bell yesterday and that may be a relief to the Nasdaq, which has been dragged down by weakness in the FAANG stocks of late, so perhaps this will get stocks out of their funk. On the other hand, as I've mentioned, earnings have been strong and investors have been using the good news to sell, so we'll see how this plays out today and if any early gains can hold into the close. Facebook closed at about 160 yesterday before the report and was trading near 170 after hours. The chart shows some strong resistance in the 171 area, so we'll see if has what it takes to take out that level. If it can't.... that could be more trouble for the Nasdaq.

AT&T was down sharply after hours but, if you can believe it, AT&T has half the market cap of Facebook so I don't know if this stock even matters much anymore to the indices.

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The S&P 500 / C-fund tested the 200-day EMA again, and it held again. This is the second test of the lows and triple bottoms are not as common as double bottoms so there is a chance of a breakdown here. The first test in late March, early April lasted a couple of weeks as the 200-day average was repeatedly hit and repeatedly held for the most part. We know about "V" bottoms, which is what happened in February. Then there's "W" bottoms, which is what we sort of had at the early April low, so now we're going for that third test, and you don't here about those for a reason -- because they don't tend to hold, but we'll see.




The small caps / S-fund remains relatively stronger than the large caps but it still closed below the 50-day EMA for a second straight day.




The EAFE / I-fund pulled back sharply as the overseas markets followed the queue from U.S. stocks on Tuesday and fell. Add to that the strength in the dollar and we have a lagging I-fund.




The dollar has been rising and broke out earlier this week. Now it is about to test the resistance of the 200-day EMA which has held for over a year as the dollar has been in a long-term down trend. If it can manage to break above the 200--EMA, and with rates rising that is possible, the I-fund could start to lag again, but also U.S. stocks may get a bit of a headwind.




The High Yield Corporate Bond Fund hit the target we talked about yesterday, and bounced, but it is still below the 50-day EMA - for a 2nd straight close - and in a short-term trading channel, but it looks poised for at least a brief breakout after the positive reversal day off double support.




The AGG (Bonds / F-fund) made a new 52-week low yesterday after the 10-year yield closed at a multi-year high.




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

Tom Crowley


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