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Pullback

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After a couple of days of stalling near the recent highs, stocks pulled back on Tuesday. The Dow lost 179-points, or 0.67%, while the Nasdaq led on the downside with a 1.5% loss, and the S&P shed about 1%. Small caps and the Transports were down as well, but for the first time in few days they outperformed the S&P 500.

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The market started to deteriorate after remarks from St. Louis Federal Reserve Bank President James Bullard that a quarter-point interest rate cut would be appropriate. Many on Wall Street were expecting more than 0.25% in July and had been pricing in a 0.5.% cut, but yesterday the Fed Funds futures went from 43% chance of a 0.50% cut, down to a 35% chance. They are still pricing in a 100% chance of at least a 025% cut. They are also pricing in 4 rate cuts through next April? Are they heading to 0% again? How weak is this economy, anyway?

Yesterday we saw that new-home sales fell to a five-month low in May, while the Consumer Confidence fell to its lowest confidence level since 2017, 121.5. It had been anticipating a reading of 132.0.

After the bell Micron and FedEx were up on decent earnings, and those are two big names that mean something being part of the semiconductor and Transportation sectors respectively. We're still out a few weeks from the bulk of 2nd quarter earnings releases, but this may set an unexpected decent tone.

We saw technical damage done to some of the charts with small caps falling back below their 50-day EMA, and the Transports buried back below its 50 and 200 day averages. The S&P 500 still looks OK and is coming off all-time highs, and yesterday it may have just adjusted for a 0.25% rate cut rather than a 0.50% cut. It goes to show how important the Fed is. Yes, we have the G-20 and some possible trade news coming up and we will get a reaction, but right now it's all about the Fed, and the question going forward is, was yesterday's 1% decline in stocks enough, overdone, or is there more to go to account for that smaller than expected cut in July?



The S&P 500 (C-fund) pulled back sharply after flirting with new highs the last few days. A test of the open gap near 2900 would be a clean place for it to hold if the pullback continues, but it is quite extended above its moving averages and may need to also test one or more of those three major EMAs, before this pullback is over. It may have gotten ahead of itself and yesterday it adjusted for the probability of a 0.25% rate cut in July rather than a 0.50% cut. But how much that is worth to the S&P is questionable, but over the next few days investors will try to put a price on that. In the meantime the G-20 meeting and the trade meetings will also have their impact.




The DWCPF (S-fund) was down but held up slightly better than the large caps for a change. It's back below the 50-day EMA and the 3 to 5 day watch is on to confirm the breakdown.




The Dow Transportation Index took another hit and falls further below the key 50 and 200-day EMAs, after the failed breakout last week. It's too early to say, but it looks like a lower high is being formed. Does that mean a lower low is next?




With Micron up nearly 10% afterhours yesterday, can it help this beaten down and lagging Semiconductor Index, which has been impacted negatively by the Chinese trade situation? The index fell back below its 50-day EMA yesterday and may be forming a head and shoulders pattern, so the reaction to Micron's earnings could be a make or break event for the semis.




The EFA (I-fund) pulled back to fill one of the several open gaps created on the chart since the May lows.




The High Yield Corporate Bond Fund was down sharply yesterday but it is coming off last week's surge higher, and may have gotten ahead of itself. Watch the 86.25 area, if it gets that low, as a key level as an open gap meets some old highs. It already broke below the rising support line.




The yield on the 10-year Treasury closed below 2% yesterday helping push AGG (Bonds / F-fund) back near new highs.




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

Tom Crowley


Posted daily at www.tsptalk.com/comments.php


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S&P500 (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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