TSP Talk Blog

Stocks opened firmly higher on Thursday, but the bulls couldn't hold onto those gains and we saw a quick give back and fall into negative territory by 11 AM ET. The indices fought back for much of the day, moving back into positive territory and nearly reaching the morning highs minutes before the close before encountering a mini rush for the exits in the final minutes of trading. The Dow held onto a 50-point gain but the broader market saw slight to modest losses on the day.

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There was actually a "hidden open gap" on the chart which made the sharp morning sell-off make a little sense. The S&P 500 closed near 2900 on Tuesday, and the low on Wednesday was about 2918, and on Thursday we saw an attempt to fill that gap before it reversed back up.



The story of the day was speculating on Jerome Powell's speech on Friday, but the market mover was the fact that yields rallied, yet stocks were more tentative, and that broke the trend of stocks following yields. The reason may have been that the 2-year Treasury yield moved up more than the 10-year Treasury yield did, closing the gap to 1 tick...



... and now the inversion is where it was at the lows last week.




Is that a reason for stocks to fall? Well, it's supposedly a recession indicator, although recessions don't tend to come for many months, if not more than a year, after the inversion historically, so it may be more of an emotional reaction than rational.

However, the global economies are struggling and everyone believes that will be more of a drag on the U.S. economy at some point. They want rates dropped now to head off any potential recession here. However, interviews with some of the Fed members in Wyoming yesterday suggests that they are not all on board the rate cut train yet. Perhaps Powell's speech will clear it up. But if it doesn't, will investors sell now and ask questions later?

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The S&P 500 (C-fund) had an interesting day as it traded in a fairly wide range despite closing relatively flat. It pushed down to fill that "hidden gap" I mentioned earlier, and rallied up above the 50-day EMA before settling right about where it closed on Wednesday, which is right below the 50-day EMA. That large bear flag could still be a concern and with it trading right up near the top of the flag, the downside has a lot more room, unless the Fed can say something that erases the flag with a breakout to the upside.




The S-fund tried to recapture the 200-day EMA again, and again traded above it, but failed hold into the close. It's the 20-day EMA that seems to be of some significance here, going back to May.




The Dow Transportation Index has also been hindered by the 20-day EMA recently, which is not a very bullish sign since that resistance shouldn't be as firm as the 50 and 200-day EMA's, which are 200-300 points above the current levels. It seems to be trying to make another "V" bottom, but it needs to focus on taking out that 20-day average first.




The EFA (I-fund) struggled yesterday and has continued to lag all year. There's a "V" bottom and possible weird looking bear flag battling it here.




AGG (F-fund / bonds) had a bad day with yields rallying strongly. We did see a break below the top of that rising trading channel, which had been acting as support for a couple of weeks. As I mentioned the other day, if this moves back into the channel and more so, tests the bottom of the channel, it could be a green light for stocks since yields would be moving higher. The question is whether the 2-year yield moves higher faster than the 10-year yield which would invert them again.




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Thanks for reading. Have a great weekend!

Tom Crowley


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