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Rally reaching toward new highs, but does it need a breather?

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Stocks were mixed and mostly flat on Friday as the indices faded from the morning highs, so inventors once again preferred to sell late on a Friday - apprehensive of the weekend headlines. Bonds were down (yields up) as we head into this week's FOMC meeting which should result in another 0.25% interest rate cut. The I-fund held onto some big gains.

Daily TSP Funds Return

The momentum off the recent rally stalled for a day and the indices may need time to digest the recent gains, which have helped the normally weak month to some 3-4% positive returns in TSP stock funds during the first half of September. Over the weekend there was a drone attack on the Saudi Arabian oil production facilities. According to the Wall Street Journal:

"Saudi Arabia is shutting down about half of its oil output after apparently coordinated drone strikes hit Saudi production facilities, people familiar with the matter said, in what Yemen’s Houthi rebels described as one of their largest-ever attacks inside the kingdom.

"The production shutdown amounts to a loss of about five million barrels a day, the people said, roughly 5% of the world’s daily production of crude oil. The kingdom produces 9.8 million barrels a day.

This will surely send oil prices higher, and the S&P futures were volatile on Sunday night and modestly lower but emotional moves on Sunday night don't always translate into the same type of opening on Monday morning.

Bond yields have reversed sharply off their September 3rd low, particularly on Thursday and Friday where the yield on the 10-year Treasury busted through the 50-day EMA and some descending resistance. There is still more overhead resistance and with the Fed's cutting rates this week, we'll see if this rally in yields can continue.

What this has done is steepen the 2/10 year yield curve which had inverted in August, but no more.

Looking back several years we saw an inversion in 2006 initially, and that did lead to a recession two years later, but it didn't mean stocks were rolling over at the time. As a matter of fact, stocks did very well for 18 months after the initial and subsequent inversions. By the time the market peaked before the 2008 bear market started, the 2/10 yield curve had already steepened quite a bit.

Bottom line: The inverted yield curve in August may still be indicating a recession is coming, but that doesn't mean it is coming any time soon so it is still safe to trade this market.

The S&P 500 (C-fund) was fairly flat on Friday after Thursday's indecisive spinning top formation. It looks like it may want to take a break at a potential double top set up, but with the Fed cutting rates again this week and delivering a policy statement on Wednesday, we could see a lot of volatility based on their comments, and that could throw technical analysis for a loop - in the short-term anyway. But the news tends to show up in the charts first so I wouldn't be too surprised to see that pullback this week. It may not seem like it at the time, but it would be to the bulls' benefit, I believe, to see that open gap by 2940 get filled before this chart tries to make new highs.

The S-fund was down slightly on Friday after its very strong recent rally. After losing more than 4% in August, it has rallied 3.7% so far in September, not usually the most friendly month for stocks. The 20-day EMA is about the crossover the 50-day EMA, and while that's usually a bullish intermediate-term sign, it can be an indication of an overbought market in the short-term - similar to the crossover in June.

The Russell 2000 small caps index is not our S-fund but the S-fund does take its queues from it, and Friday's action shows a negative reversal pattern that has resulted in short-term pullbacks in the past.

The EFA (I-fund) has been leading on the upside this month as it continues its trek toward the July high. There is an open gap just overhead, but during this recent rally in September is has left several open gaps on the downside as well (red).

The Dow Transportation Index is near its July highs as well and potentially setting up for an overbought, double top dip or pullback.

AGG (bonds) has been showing some cracks after the long rally to start the year. It fell through the 50-day EMA, always a warning, but the bottom of the rising red channel channel is still in the picture so we could see a relief rally in bonds in the coming days.

Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to:

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

Tom Crowley

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