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Another day, another headline driven market

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Down 767-points on 8/05, up 312 on 8/06, up 371 on 8/08, down 391 on Monday, and the latest turnaround Tuesday pushed the Dow up 373 yesterday. Are we having fun yet? Have you got it all figured out? Easy, right? Welcome to the headline driven market, which seems crazy, but if you pull back a bit, there is a picture being drawn.

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After a couple of days of selling triggered by negative trade headlines, there was a surprise announcement of a delay in "some" of the scheduled September 1 tariffs on China, and the Dow shot up 400-points in 15 minutes. On September $115 billion in tariffs will be due, and on December 15 $160 billion more. Apparently that's worth about 400 Dow points.

There is also another meeting scheduled in two weeks between U.S. and Chinese officials, and that brought out optimism, but I think the two sides are still too far apart to expect any major deal to be announced.

Despite a sharp drop in the VIX yesterday, this headline driven market now has investors on edge even more because it's one headline or tweet away from another 300 - 400 point move.

Strong trending markets can actually be a market timer's obstacle, so I prefer a more volatile / choppy market for trading purposes, but when the swings are moving wildly up and down and changing direction every day or two, it's difficult to take advantage in our transaction limited TSP accounts. You almost need to pick your side and close your eyes for a while and at the end of the week see how it played out. Whether you are a bull or a bear, the back and forth has been frustrating to watch on any given day. You're right one day, and wrong the next.

The good thing about these moves and the violent reversals is that it firms up the charts support and resistance lines a bit. The trading ranges may get wider, but the recent high and low levels still create formations that do tend to resolve as a chart pattern is expected to, so again, not watching the market during the day but rather seeing what the charts look like at the end of the day, or end of the week, may be less confusing or frustrating.

For example, this 2019 chart of the S&P 500 actually looks fairly orderly despite the wild swings. The action is currently doing a good job of mimicking what we saw after the May 1 peak. This could be a bear flag about to fail near the 50-day EMA which could lead to a new leg down. Or, if that 2950 area is taken out, we'll likely see a test of the highs again.

The hard part is putting your opinion and ego aside and just going with what the chart (or your system) is telling you, and not watching and reacting emotionally to a 400-point rally in 15 minutes like we saw yesterday morning. It was merely a rally that retested the 50-day EMA, similar to the one in mid-May.

The good news is, this kind of action does a good job of pushing investor sentiment to negative levels which acts as a cleansing agent, and like we saw in December as an extreme example, or even the end of May more recently, once it's over a decent sustained rally can follow with clear support lines - even if it turns out that a recession is brewing.

And speaking of that, the 2 / 10 year Treasury moved closer together (flattened, as they call it) and are that much closer to inverting.

Yield curve inversions “predicted 7 out of 9 recessions during the post-war period. This is a track record any economist would be proud of,” wrote Sung Won Sohn, professor of economics at Loyola Marymount University and president of SS Economics. “If the inversion started today, the economy could be in a recession within a year.” source: CNBC

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The S&P 500 (C-fund) and other indices actually opened in negative territory yesterday, which made the 40 - 50-point rally in the S&P over the next 15 - 20 minutes so impressive, and gives another example of why we are still in a headline driven market, rather than a data driven one. Technically it couldn't overtake the 50-day EMA, so that's a third day where it tested and failed. That makes today's action that much more important since the bulls have some momentum heading into the day.

The DWCPF (S-fund) gained 1.1% which didn't quite get back all of Monday's losses, but it did manage to close just north of the 200-day EMA again.

The Semiconductor Index exploded 3% yesterday but technically it isn't out of the woods yet. That looks like a bear flag to me, but closing back above the 50-day EMA gives the bulls something to try to build on today.

The Dow transportation Index rallied with the rest of the market but other that the 10,000 area holding over and over again recently, this chart needs more help to keep from breaking down.

The EFA (I-fund) was up nicely but is still in a technical quagmire being below the 200-day EMA and in an obvious bear flag.

Some strong inflationary data from the CPI yesterday helped move bond yields up, but it was the tariff delay that stole the show and helped push the AGG (Bonds / F-fund) into the red by the close. Strong data or positive trade action helps the economic picture and tends to move yields up, and bond prices down. We haven't had a lot of that lately.

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

Tom Crowley

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