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Dovishness making it tough for investors to sell

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Stocks opened higher on Friday and continued to drift upward all day, and into the close, as if no one was willing to sell. The Dow rallied 245-point and the big three indices all made new all-time highs on the day. Even the recently beaten down Dow Transportation Index popped higher after lagging for several days. Can it continue this week while 2nd quarter earnings start coming in?

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It has been six week of basically straight up action, with one small hiccup on June 25.

Most of the gains can be attributed to a Fed who is determined to cut rates, and letting the world know, despite some legitimate reasons for not doing so. I've mentioned this repeatedly but with stocks at all-time highs, unemployment near historic lows, stronger than expected inflation numbers out last week, and a president who believes this is the strongest economy in history, you have to question why interest rates would be lowered now, particularly when they are low to begin with. They are just not at 0% like they were for the 10 years after the financial crisis.

Of course investors are eating this up, and why not? When bonds yields and bank accounts are paying such low returns, stocks are the place to get returns, but when valuations get inflated to a point where the price to earnings ratios are near levels only seen, well almost never.

This chart from shows the Margin Adjusted Price to Earnings ratio of the S&P 500. It's been stuck in this overvalued state for a few years, and much of that has to do with those 0% interest rates over the last 11 years, before the Fed starting hiking last year. Can stock prices remain elevated if rates go down again? Maybe so, but there is little room for error.

Chart source:, analysis from TSP Talk

Seasonality has been on the side of the bulls in the first half of July, and that is about to change to some degree, as there is a tendency to see some kind of "sell the new" reaction to earnings reports.

Chart provided courtesy of, analysis from TSP Talk

Can stocks continue higher? Absolutely. The action has been good and there's no rule that once they get x% overvalued that they have to come down. But history tells us that the market has cycles, and stocks can go from overvalued, to extremely overvalued, to appropriately valued, to undervalued, to extremely undervalued, back to undervalued, to appropriately valued, to overvalued, etc. Wash, rinse repeat. This market has been stuck on the extremely overvalued side since about 2016, according to the Hussman Chart up above. That's usually enough to get investors complacent about the whole process. If you owned stocks in 2000 and / or 2008, you know how quickly it go from great to awful.

The S&P 500 (C-fund) made another new high on Friday and it's hard to argue that the action isn't good. Of course stocks don't go straight up forever and we are seeing possible rising wedge formation (red), which tend to break down. But if the Fed keeps hammering rate cuts in an economy that is holding its own, perhaps it is "different this time?"

The DWCPF (S-fund) continues to reach up toward the early May high and the action, while very positive overall, has been quite volatile with big up days and big down days recently, creating that bullish flag-like formation. It looks like it wants to break to the upside, which is what bull flags tend to do, but the double top near 1450 may prove to be resistance, as they tend to do.

The Dow Transportation Index had a huge day on Friday, and that's two big days in a row after it had broken down below the 200-day EMA just a few days before. There is some resistance in the 10,650 - 10,700 area.

The I-fund has been able to hold above that old resistance line, which is trying to hold as support now. You can argue that a bear flag is forming (red), although it is rather small. 65.50 is the key level that needs to hold.

AGG (Bonds / F-fund) was up on Friday after a couple of rough days. It's interesting that yields were rising last week (as bond prices moved lower) during a week that the Fed was banging the table about interest rate cuts.

Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to:

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

Tom Crowley

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