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TSP Talk Market Commentary 02/10/2020

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Stocks were down sharply on Friday and despite that, the indices had one of their best weeks in months. Whenever you get a strong economic report like Friday's jobs report - or positive news headlines in general - and stocks are down, that sends out a red flag. The thing is, there has been a pattern of weak Fridays all year. The question is whether Monday is a bounce back day like we saw last week. The Dow lost 277-points, so it and the caps were the laggards on the day.

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At some point in the economic cycle, a jobs report like the one we got on Friday would have had the effect of telling the Fed that there's no need for further rate cuts; the economy is doing just fine. If investors were looking for a rate cut, the market could have gotten a little cranky on this strong economic report. But no one is really looking for another rate cut right now.

So perhaps it was just a matter of profit taking on Friday after a strong 4 day start to the week and new all time highs in the major indices, which brought us to a Friday with coronavirus numbers still climbing. After all, that's three Fridays in a row that stocks have been down fairly significantly, and 5 of the 6 Friday's in 2020 have been down days.

The U.S. stock market futures were already down before the jobs report was released, so the coronavirus seems more like the culprit than the jobs report itself. That's a little concerning, but stocks did bounce back from the prior Friday sell-off so it may all depend on those weekend headlines.

The decline in bond yields (rally in bond prices) was even more curious because it is generally a sign of weak economic data, but with the jobs report, it didn't make a lot of sense unless there's something else going on here, and that thing must be the coronavirus and upcoming weekend.

But that doesn't explain why yields have been falling for a year now, which seems more related to the yield curve inversion, and then the bear flag (red) broke down a couple of weeks ago, just as the coronavirus became a thing.

I know I have been expecting a possible recession because of last year's yield curve inversion, but the jobs report didn't show any signs of that yet. Of course jobs data can be the last thing impacted by a weakening economy and it isn't until we start seeing real weakness that employers might start letting employees go, but none of that seems to have started yet.

There was a coronavirus chart going around and it showed a projected number of case for this date being near 800,000 with more than 16,000 deaths. In reality there have been 'only' 800+ deaths to this point, primarily in China, so it feels like it is being overblown. 800 deaths is nothing to ignore, but I heard on the news the other day that 100,000 people have died from the flu already this year. I suppose if the Chinese economy gets weakened dramatically over this, the entire globe could feel the impact, but right now, with less than 1000 deaths in a country with about 1.5 billion people, the actual impact should be negligible, but the fear factor is a different story, and that seems to be what is being played up.

I'm sure there is more to this than I understand, and the math is being done by those who are trying to put on number on this issue regarding what impact it may have on earnings and GDP in the next quarter and next year. Even if it's not that impactful, February is one of the weaker months historically for stocks, and perhaps a refresher downside move is overdue regardless?

The S&P 500 (C-fund) broke out to new highs on Thursday, then on Friday we get a solid jobs report that was better than expected, and the result was a failed breakout. Yes, the four days prior were big positive days and gaps were opened all along the way, but a failed breakout is a technical concern so the bulls come into the new week with the job of trying to avert a double top formation here.

The DWCPF (S-fund) lagged again and that could be the coronavirus having an impact as larger companies like Amazon and Microsoft were actually up quite a bit on Friday. Investors know these companies will survive and likely thrive no matter what happens, but can a small company survive an economic slowdown?

The EFA (I-fund) fell sharply and again the dollar is reaching toward new highs putting the pressure on the International stocks. It's off its lows but unlike the S&P 500, it never did make a new high last week.

Here's the chart of the dollar popping into new high territory, but there is quite a bit of resistance near that 26.65 area, which could turn into a double top. Also, there's a big open gap down by 26.45 so there is a reason to suspect a pause here.

The Volatility Index got a bounce off of the support we talked about on Friday. There's also an open gap near 17.0 that may need some attention before it settles down.

The AGG (bonds / F-fund) rallied strongly, bouncing right off the bottom of that rising trading channel. We saw that support and suspected it could hold, but who would thought that would have happened with the blow out jobs report? I would have expected that move on a poor jobs report.

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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