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Can stocks rebound from worst week of the year?

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It was a rough week for stocks last week, the worst of the year for some indices, but there was some sign of life later on Friday when stocks closed well off their lows. The Dow fell 98-points, which was about 230-points off the lows, but we did see some sharp losses over 1% in the Nasdaq and small caps while the S&P 500 gave up 0.73%.

Daily TSP Funds Return

The July jobs report came in at +164,000 which was basically inline with the estimates, while the unemployment was a tick higher than expected at 3.7%. Those figures didn't do anything that might help push the Fed back to the more dovish stance they seemed to have a few weeks ago.

One of the catalysts for the Fed to cut rates has been the uncertainty of the trade war and Trump's addition 10% tariffs on China, which are scheduled to go in effect on September 1, probably means more rate cuts in September if something doesn't change in the interim, but now the stock market and the bond market are trying to price in this new situation.

Bonds were up slightly on Friday after Thursday's big rally and yields are slipping with the 10-year Treasury yield move back below 2% last week. The yield curve between the 3-month and the 10-year had ticked positive briefly in July, but since the Fed meeting and the trade war set back, it has become inverted again.




That's an issue but the institutional investors are probably more concerned about the 2-year and 10-year curve which is still not inverted. If that one inverted it would almost certain indicate that a recession is nearing, and the new tariffs on China would escalate those chances.




At this point the market is worried but they also know it is one positive tweet away from a possible reversal, so I don't think the bulls or the bears are very comfortable right now.



The S&P 500 (C-fund) lost another 0.73% on Friday but we did see a nice intraday reversal. That is typically a good sign for the next trading day, however I think the bears may have backed off in the afternoon knowing another tweet over the weekend could turn things around. But without any new developments, and I'm writing this on Sunday morning, I think any rebound could get sold again. A possible initial downside target if Friday's reversal doesn't hold would be the 100-day EMA where another open would get filled (red).




The DWCPF (S-fund) also created a nice positive reversal tail and it looks like it may want to bounce, but it may be the weekend thing where the bears didn't want to remain too short so they covered some positions to help the reversal.




The Dow Transportation Index had fallen out of the rising trading channel on Thursday and on Friday it broke below the 200-day EMA again. Always a concern.




The EFA (I-fund) is also testing the 200-day EMA. The dollar has been pulling back on the trade news and that could provide some cushion, but if U.S. stocks go down, I'd expect the direction to be the same here.




I mentioned the Chinese Shanghai Index a few days ago as being an interesting tell for our markets. The last move here was the head and shoulders pattern breaking down so that may not be a great indicator for our market.




AGG (Bonds / F-fund) was up slightly after Thursday's big rally, and now it is in the middle of a large rising channel. Now that it made a new high, reaching the top of that channel is very possible, but with the yield on the 10-year below 1.9% now, it seems a little extreme. I suppose 1.5% is possible there, but unless we're going the way of European bonds, I don't see the 1-year going much below that.




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

Tom Crowley


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SPY (C Fund) (delayed)

(Stockcharts.com Real-time)
DWCPF (S Fund) (delayed)

(Stockcharts.com Real-time)
EFA (I Fund) (delayed)

(Stockcharts.com Real-time)
AGG (F Fund) (delayed)

(Stockcharts.com Real-time)