TSP Talk Blog

Consumer Confidence came in much better than expected, but that didn't help stocks yesterday. They did rally early on Tuesday, and what the market needed after Monday's big rally was some follow-through. Unfortunately for the bulls, that didn't happen as the open was sold and stocks slid lower for much of the day, although we can't give the bears too much of a victory because they were unable to break the indices, despite the setup being there for them. The losses were moderate, the Dow was down 121-points, although small caps and the Transports did get hit hard.

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The futures were up after the bell yesterday on Hewlett Packard earnings, and those gains had almost wiped out the Monday loss in the S&P 500 futures when they opened again at 6 PM ET. Of course that doesn't mean much about today's open with the overseas markets getting ready to start trading, but it gives the bull a slight edge on the day.

At first investors seemed to shrug off the 2 / 10 yield curve inverting again, but as the day wore on the pundits were blaming the weakness in stocks on this inversion, which closed at a meaningful inverted level for the first time. The 2-year yield closed at 1.54% while the 10-year is 1.49%.




I did read somewhere that the 90-day bond yield inversion above the 10-year yield, which happened several months ago, has a 100% track record for predicting a recession in the next year so. That's pretty compelling, but it's tough to weed through the noise however because, politically speaking, there are a lot of folks, even in the media, who are cheering on a recession hoping it will end Trump's presidency.

So, when you listen to recession commentary, take what you hear with a grain of salt The Trump administration and Trump supporters may tell you that everything looks great, while Trump haters and those on the democratic side may exaggerate the weakness. Let's listen to the economic data rather than those with an agenda. The yield curve is certainly suggesting that a recession is possible and that's a big one and I'm all ears there, but until GDP, employment numbers, and Consumer Confidence start dropping, then it's tough to come to that conclusion this early.

Investors are waiting for the next headline or tweet regarding trade, the Fed and interest rates, and economic data. Earnings season is basically over with a few names still dripping in. Meanwhile the market is vulnerable to more volatility this week as the trading volume dries up because of the summer vacations. Light volumes mean the indices can get pushed around more by bigger traders / investors.

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The S&P 500 (C-fund) moved up in early trading, hit that 100-day EMA, and backed off. As the 50-day EMA slides slowly lower, and the 200-day EMA moves slightly higher, the trading range is narrowing and something is going to give eventually. The bears may be running out of opportunities after the bulls were able to bounce off that 200-day EMA 5 times this month. But if the bulls keep letting them knock on that average, it will eventually give.




The S-fund had a bad day losing more than it gained on Monday with its near 1% loss. It is flirting with the recent lows, so this one is knocking again.




The real small cap index, the Russell 2000, actually closed at its lowest level since mid-January. At that point it was breaking back above the 50-day EMA. This time it's well below it.




The Dow Transportation Index is in a similar situation as it too closed at its lowest level since January, although this chart doesn't go back that far. 9700 looks to be the line in the sand.




The EFA / I-fund held up OK yesterday but remains in that descending flag pattern. That flag in May was more of a falling wedge formation, which is more bullish, but this current flag is widening, and I'm not sure what to make of it. We'll just see which way it wants to break, but being below the 50 and 200-day averages gives the bears an advantage.




AGG (F-fund / bonds) made new highs again as falling long-term yields continue to be the main story. The inversion has recession on many folks' minds, although not all agree that it is foretelling a recession. We are hearing a lot of "It's different this time", but is it?




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

Tom Crowley


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