TSP Talk Blog

After a rabble-rousing Fed fueled rally on Thursday, stocks reversed down on Friday following the first yield curve inversion in many years. The Dow lost 460-points and we saw losses from nearly 2% to over 3% in the case of the small caps. Bonds rallied sharply after the yield on the 10-year fell below 2.5% for the first time in over a year.

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It was a schizophrenic week for stocks last week after the Fed gave the market reason to rejoice by announcing that there will be no more rate hikes in 2019, but that rally was short-lived after the inverted yield curve spooked investors - as if it hasn't been a possibility for a while now. But the reality of the inversion, where the yield on the 3-month Treasury closed about the yield on the 10-year Treasury Note, certainly seemed to stun the market. That's a warning sign that a recession could be in the cards in the near future.

That's the first time the yield curve has been inverted since 2007, but back then it initially inverted in early 2006 so it took quite a while before we did eventually get a recession in 2008-2009.




Markets tend to peak before the recessions actually hit and in case of the 2008-2009 recession / bear market, the stock market actually peaked in the fall of 2007 so the indices can act like a leading indicator. If you recall, despite the recent big rally in stocks the S&P 500 actually peaked in the fall of 2018, and in the case of the NYSE Index, in January 2018.

I suppose it makes a little more sense now for the Fed to stop raising rates since they are seeing the same thing. It was just such a dramatic change in outlook from their December rate cut.

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The S&P 500 (C-fund) fell below that key 2815 level on Friday, which was the old breakout level that was holding for many months. It must get back above it or the bears will try to take control again, probably for the first time all of this year. We saw what they could do in December, but for the most part they've been hibernating since. There is still a few layers of support starting at 2800, where the index closed on Friday, then there's 2750 and 2725, which are near the 50 and 200-day EMAs.




Here's that yield inversion as the 10-year Treasury Note closed at 2.455% while the 3-month Treasury closed at 2.460%. It's not much, but as I said, it's the first time in about 12 years that it's happened.




The small caps have been hit hard during the pullbacks and the Russell 2000 made a lower low on Friday, and that technically cements a lower high as well.




The EFA (I-fund) was hit hard but it remains above a lot of key support at this time.




Here's that 10-year yield in a larger chart. While it did break down to a new low, there was a bit of a capitulation-like intraday reversal on Friday so we'll see if any profit taking in bonds takes place early this week. Not only to ease some oversold yield conditions, but it could also un-invert the yield curve if it happens.




The AGG (Bonds / F-fund) broke out above yet another extreme resistance area so bonds have come a long way in a short time, and may be in need of a rest in the short-term. That is if we don't start seeing FOMO buying in the bond market.




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

Tom Crowley


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