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New highs heading into Fed rate cut week

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Stocks rallied on Friday helped by a better than expected GDP report, although it was not a given that investors would appreciate a strong economic number with the Fed on deck this week poised to cut rates. The Dow gained 51-points, or +0.19%, while we saw more impressive gains in the broader indices including a 1% gain in our S-fund. The I-fund was down because the dollar made another new 52-week high, which weighs on foreign stock prices.

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Earnings have been coming in a little better than expected - although expectation were lower than last year's numbers. Economic growth, which was showing some cracks, seems to be holding up fairly well again as the new data rolls in. Friday's 2.1% GDP report was higher than the 1.8% that was expected. With the strength and the Fed expected to cut interest rates this week, I guess it shouldn't be a surprise that stocks are at record highs. Instead it's a surprise that the Fed would cut rates in this kind of environment, and it seemed the market understood that the stronger than expected GDP was not going to change the Fed's mind, so it may have the perfect bullish storm going right now. However, with the 10-yearTreasury yield still close to 2%, the bond market is still not convinced that the economy is all that strong, and this may be what the Fed is concerned about.

There were also some concerns from Larry Kudlow last week about any trade deal with China not being a "blockbuster" but the market seemed to ignore that comment.

Despite the Fed's attempts, the market rarely makes it that easy for investors, and while we could see a continued run up into the FOMC meeting on Wednesday, we might want to be on the lookout for the unexpected - a sell-the-news reaction to the cut. Also, after a strong two-month rally, a new month can often bring with it a change in direction.

This chart is old (last updated in 2011), but still has 62 years of data showing the relative weakness for the next two months compared to the other months.

Chart provided courtesy of

The S&P 500 (C-fund) has been doing great and closed at new highs on Friday, but the chart looks a little vulnerable now that it is testing some overhead resistance and possibly at the apex of a large rising wedge formation (red). The short-term rising trading channel in blue doesn't pose much of a threat since it is the middle of that range, so there will be a little battle there to start the new week.

The weekly chart is showing just how far this market has come since the December lows, but it is only in the middle of that blue rising trading channel. On the other hand, it is also just now hitting the top of the more stable, slowly ascending trading channel going back to that January 2018 peak. The Fed has the power to make the S&P bust right through channel - or turn the ship around from that resistance.

The DWCPF (S-fund) made a new intraday high for 2019 after what looked like a failed breakout on Thursday. The trend is up, but the index is getting pretty stretched along with the others.

The EFA (I-fund) has been lagging because of this year's strength in the dollar. It looks like it could be a bull flag forming, but it would likely take a pullback in the dollar for that flag to breakout.

The dollar has closed at a new high and is in the middle of that wide ascending trading channel. If there is going to be a pullback here, that open gap near 26.34 could be the lure.

AGG (Bonds / F-fund) has been consolidating since the early July peak, and despite a few attempts, it hasn't been able to get above the top of that gap that it filled last week.

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

Tom Crowley

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