TSP Talk Blog

Stocks rallied Tuesday on trade optimism and dovish talk out of the ECB. The Dow jumped 353-point, or 1.35%. The S&P 500 and small caps added about 1% each on the day. There was some tentative selling toward the close, but that is not a surprise heading into today's FOMC rate decision. But on whole, it was another Turnaround Tuesday after a week of churning.

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What a difference a tweet makes. Stocks up, bonds prices up, gold and silver up, dollar up, oil up, copper up, high yield bonds up - all on a day before the interest rate decision. We had bull flags on the charts so the breakout to the upside isn't too much of a surprise, but to come before the Fed decision on rate... brave investors.

One of my "What ifs" yesterday asked, "What if there is some progress in the trade war between now and the end of July that could keep the Fed at bay?" We saw the market rally on the prospects after a bullish trade tweet from President Trump. But before any trade deal is made with China however, we'll probably have a dozen or more tweets pushing the market back and forth in the process.
So we head into today's rate decision with stocks near all-time highs, hopes of progress on the trade war, and the unemployment rate at 3.6%, historic lows. How in the world can the Fed justify a rate cut unless their goal is to take back the hikes they made in 2018, which arguably were a mistake, and turned out to be part of the catalyst for the recent slowdown in the economy? The last time there was a rate cut we were in a financial crisis.

Here's a history of interest rates.

Source: https://www.macrotrends.net/2015/fed...storical-chart


Other than threats from the president of "let’s see what he does" referring to Fed Chairman Powell and his future, would the Fed use one of what few bullets they have left in an economy like this and stocks 1% away from all time highs? The economy is showing some signs slowing, but there is certainly no crisis at this time. Are they willing to go all the way back to virtual 0% rates if we do get a recession or just one negative GDP quarter? I'm sure that's the last thing they'd want. The trend is down, but it's hard to get lower than 0%, unless you're a German Bund.

And speaking of Germany, the DAX and other European markets were up sharply on Mario Draghi and the ECB's more dovish stance.

I talked about having to be nimble this summer. This feels like one of those times. As you'll see in some of the charts below, we had bull flags in 2018 do what they are supposed to, breakout to the upside, but those turned out to be better selling opportunities rather than a time to jump in. If stocks rally on a rate cut, it's probably just another opportunity to raise cash. The one catch is that the market does have a good record going forward after a Fed's initial rate cut. But will we see that first cut anytime soon?

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The S&P 500 (C-fund) broke above that bullish looking flag, and that's what bull flags are supposed to do. However, after the gap up open, there was a bit of a negative tail created making it a possible reversal formation. We saw one in May that turned out to be a peak, then we got another earlier in June which wasn't a problem. But we know the reaction to the Fed will likely trump the short-term technical analysis.




Twice in 2018 we saw a similar looking bull flag. Both broke to the upside. Both also failed shortly thereafter. Again, the Fed may do something to change this trend.




The DWCPF (S-fund) had a nice day again, opened up a small gap, but also created a large reversal tail.




The EFA (I-fund) had a big day after the ECB's dovish talk. It too filled a couple of open gaps while opening up another.




The Dow Transportation Index rallied over 1% but continues to struggle below the 200 and 50-day averages.




The AGG (Bonds / F-fund) made another new high after the trade war optimism, but the gain looks similar to the pop earlier this month, which faded during the day like yesterday. There's an open gap below yesterday's low. The trend is still up but we may see this moving down toward the bottom of this channel if they don't cut rates today.





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

Tom Crowley


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