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Goldilocks economic reports continue to fuel rally

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Another big day for stocks as the Dow added another 197-points making it 1200-points since last Thursday's lows. The large caps outperformed the small caps for a second straight day as the Russell 2000 small cap index nears its all-time highs so we may be seeing some catching up being done by the lagging larger indices. The I-fund got some help from a weak dollar, which was due for a rest after rallying for three weeks.

Daily TSP Funds Return

We've had a few goldilocks economic reports lately, starting with last week's jobs report, which have indicated decent growth, but tepid inflation. Combine that with a 1200-point gain in the Dow over the last week and I would say we better not get a "hot" number - a number that is inflationary, because there's a lot of profit taking to be had.

Investors seem to be OK with that 3% yield right now, or at least the 2.9X% because 3% can't seem to hold, but if we do get that hot number, that could all change.

We had the feel good story of the hostages being released from North Korea, which is great, but behind us, and with a strong earnings season winding down over then next couple of weeks, and the Fed's next FOMC meeting still a month a way, we have to wonder what the next catalyst will be.

Whether this move higher it is sucking in the late "dumb money" or if this is what a rally off the ultimate bottom looks like, I don't know. The charts show that the bulls are gaining momentum, but there are still some obstacles and some possible concerning patterns forming, so the bulls may not want to stop pushing on the peddle or else we may see the air come out of what has been a good rally.

Here's a reminder that May starts the weaker part of the year. That doesn't mean everyday, every week, or every month will be down over the next 6-months, but the indices don't have the seasonal breeze at their back now as they do in November through April. You can see that the next couple of weeks does have those headwinds.

Chart provided courtesy of, analysis by TSP Talk

The S&P 500 / C-fund broke above the longer-term descending resistance line (blue dashed) and it now has a higher low and a higher high so it looks like a positive trend, but unfortunately that is still part of that large pesky bear flag (red) and the S&P may have just hit the top of it. Also, if you're into repeating patterns, take a look at the prior peaks since the correction low in February. A rally, followed by a breakaway gap up, and a day or two later, the party is over. Is that what is about to happen again?

The small caps / S-fund hit their longer-term resistance line and backed off a bit - closing off its highs on Thursday. If that head and shoulders pattern that we have been watching, is testing the middle of the head, its rally may be coming close to an end. That could all change with another big rally, but then it would have to deal with a double top near 1415.

The Dow Transportation Index had another good day and it looks like another "V" bottom off the lows. It's still a couple of hundred points below its trading channel high so there may be more room to run up, but what happens at 10,800?

The EAFE / I-fund had a good day thanks to a decline in the dollar. The bullish flag broke a couple of days ago so it finally made a good move. The problem is the top of its channel is not too far overhead.

The dollar fell sharply but it was probably due for some a pullback after the 3-week rally. The open gap near 24.15, and the 200-day EMA would be the initial targets of any pullback.

The AGG (Bonds / F-fund) pushed back into its bear flag after a breakdown on Wednesday. This still does not look good at all as far as charts go, but as I've been saying, a relief rally in bonds may not be out of the question, but why take the risk?

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Thanks for reading. Have a great weekend!

Tom Crowley

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