TSP Talk Blog

Stocks did a major flip flop, not only from Friday's close into Monday, but the futures were getting slaughtered when they opened up on Sunday evening, and by the time the opening bell rang on Monday morning, there was 700+ point reversal in the Dow futures. There were couple of attempts, not surprisingly, from the bears to sell the rally, but the bulls won out and the gains got back about 1/3 to 1/2 of Friday's losses, depending on the index. There was a very late spike higher into the close which I believe was related to the J&J court case.

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Johnson and Johnson, a Dow component, which was up less than 1% in yesterday's trading, jumped several percent right after the closing bell rang yesterday on news that a judge order them to pay $572 million in an opioid case with the state of Oklahoma. Seems like something strange to rally on, but Oklahoma was seeking $17 billion (with a "B") and Wall Street expected it to come in closer to $1 or $2 billion. I believe that late spike higher may have been related to a leak of the results just before the bell as many drug companies, large and small, rallied on the news.

The good news for stocks... that may help them move up to start the day today. The bad news is that it may be something to take profits on with many of the companies already jumping 5% to 10% on this news - and the state of Oklahoma already said they will appeal the decision. There may also be a misconception about the $572 million. Some are saying that figure may only be for the first year of compensation, and there will be more to come. We'll see if that impacts the stock prices.

It may seem surprising that stocks rallied on a day where we saw the first 2 / 10 year Treasury yield curve inversion on a closing basis yesterday.



That tells us that the Friday reaction to Trump's trade war tweet may have been an overreaction. They tried to smooth things over some with optimistic trade comments on Sunday night and Monday morning, and it seemed to work, and the chart sure needed some help ASAP because we were on the cusp of another bear flag breakdown, like we saw late last year.

The current bearish looking flag formation on the S&P 500 chart looks precarious, and they do tend to break down, but only one of the last two similar large bear flags did break down. The one in early 2018 held at the flag support line, while the other is from last fall which did break.



Barring a trade deal soon we'll probably see more volatility as we get bad news / good news reporting in the trade war saga. I could be wrong, but I don't imagine that we are very close to a deal, especially if China's plan is to hold out and hope Trump does not get reelected next year, where they probably won't face the same tough negotiations. Until then, we better buckle up.

If that's the case, the election will set up an interesting situation for stocks. This is a long way away, but let's play what if. If Trump is reelected, does that mean the trade war continues and stocks sell off again? The alternative is Trump losing reelection, but I have no doubt that the market will not react well if someone like Bernie Sanders or Elizabeth Warren becomes President. I'm not so sure about the market reaction if Joe Biden wins at this point, nor about the chances of someone other than those three democrats or Trump being our next President. But we have a long way to go so let's put that on the back burner.

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The S&P 500 (C-fund) has flirted with the bottom of that large bear flag, and held, several times now. Yesterday's rally was solid, but trading volume was quite light compared to Friday. At this point the bulls are looking for some follow-through rather than profit taking. I'll be watching that orange 100-day EMA line to see if that holds back any rally. If that gets taken out the bulls may go for the 50-day EMA again. It sounds easy enough, but bear flags are not always that friendly to the bulls.



According to sentimenTrader.com, "The S&P 500 fund, SPY, rallied more than 1% on volume that was half what it was on Friday. Of the 32 times that’s triggered, SPY added to gains over the next couple of sessions only 13 times. The last week of August is usually the lowest-volume one of the year, or close to it, so this can partially be excused by seasonality."


The S-fund was up nicely but lagged and I'm speculating that the very late spike higher was too quick for midcaps to catch up with the more popular S&P 500 and Russell 2000 indices. This still trades below the 200-day EMA and that's always a concern for the bulls. In June it cut right through that EMA, but it hasn't been as easy the last few times it tried.




The EFA / I-fund had a good day but a rally in the dollar gave it some headwinds. It's in one of those flag formations, similar to the one in May which actually turned out well for the I-fund.




Here's that rally in the dollar which was up 0.53% after Friday's big sell-off. If we erase that wild day on Friday, UUP remained in a more tame bullish flag formation with support near 26.60.




The Dow Transportation Index got a 1% bounce like most of the other major indices, but it hardly made a dent in the recent losses. It is planted well below the 50 and 200-day EMAs, but so far that triple bottom had held.




AGG (F-fund / bonds) was down slightly as yields picked up, but it remained above that rising channel again, after Friday's re-breakout.




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

Tom Crowley


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