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Fed reverses pullback

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Stocks were falling at the open on Thursday, mostly following through on recent losses, but also in sympathy with streaming content leader Netflix, whose 10% loss weighed on the Nasdaq until... the Fed came to the rescue again. The Dow was flat, gaining 3-points, but the broader indices like the S&P 500, Nasdaq, and Small Caps, as well as the Transports, all closed with decent gains.

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After a few down days, stocks bounced back and it looks like the Fed is going to use every down day as an opportunity to talk about cutting rates. New York Federal Reserve President John Williams said yesterday, "It’s better to take preventative measures than to wait for disaster to unfold.”

That was enough to turn the day around as investors hang on every word from the Federal Reserve. And why not? After all, their actions helped take the market down about 20% last December, and since they've changed their tune, stocks have completely reversed.

The action remains impressive. When one index or sector falls, another rallies, so it doesn't feel like this market is ready for a broad sell-off, and I guess why not? We have a fairly strong economy yet the Fed is acting as if we're heading for another financial disaster - planning to cut rates as if it's in trouble. We are seeing the occasion data that may indicate a possible slowdown, like the price of oil falling and breaking down again ...

But we've also seen many indications that the economy is fine: We got a big employment number in June with a 50 year low unemployment rate, surprisingly strong inflationary numbers recently, strong retail numbers, yesterday we got the highest Philadelphia Fed manufacturing index number in a year, and oh yeah - stocks are at all-time highs. Sounds like a crisis, huh?

Here's the thing though - the Fed knows a lot more than I do, and if they are cutting aggressively there must be a reason. It usually means a recession is on the horizon, or they are try to cut one off before it occurs. But if that's true, should stocks be at all time highs? As my son reminds me, the bond market may be the one making this call, and the Feds are just following its lead. After all, the 10-year Treasury yield is still near 2%.

Microsoft was up a modest 1% or so after hours as they beat their earnings estimates, and this has helped pushed the index futures up again in after hours trading.

The S&P 500 (C-fund) fell though a rising wedge-like formation on Wednesday and the Thursday low fell to the bottom of that small rising parallel trading channel (red). We had a lower high and a lower low compared to Wednesday's action, but there was a positive reversal so the short-term momentum may be back in the bulls corner.

The DWCPF (S-fund) had a good day despite initially falling through some key support in the morning. It is still just about 1% below recent highs, but still quite a bit below the 2018 all-time highs.

The Dow Transportation Index jumped 1.25% as the big swings continue. The key over the last two days is that the 50 ad 200-day EMAs, which are basically in the same spot, held as support.

The dollar got slammed after the New York Federal Reserve President John Williams made his comments about being aggressive on cutting rates. That pushed the dollar back below the 2019 rising support line, and slightly below the 50-day EMA.

And strength in the dollar gives the I-fund a boost, especially when U.S. stocks are also rallying.

AGG (Bonds / F-fund) rallied strongly again, and again it was more of the NY Fed causing this reaction, but as we talked about on Thursday, we wouldn't be surprised to see that open gap get filled, even if it does end up falling again.

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Thanks for reading. Have a great weekend!

Tom Crowley

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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AGG (F Fund) (delayed)

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