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TSP Talk Market Commentary 02/18/2020

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Stocks rallied late on Friday to push most of the indices from losses to a positive close, although the Dow did lag and close slightly in the red. Investors had been selling on Fridays with the fear of the coronavirus numbers rising over the weekend, but after the first negative Thursday since before Thanksgiving, investors did a little dip buying keeping the indices buoyant once again.

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It was looking like it was going to be the 4th straight negative Friday for the S&P 500, but that late rally decided otherwise.

Bond yields started to weaken to end the week after a couple of attempts at a rally, and the 10-year yield may have created a bearish looking flag that is now on a breakdown watch. Should that happen, the stock market may be concerned.

This stuff isn't sexy, but it's trying to tell us a story. The dollar has been rallying all year and that tends to put pressure on prices, although the stock market hasn't felt that yet.

But when we look at those economically sensitive commodities like oil and copper, we see that the damage is being done.

The question is if whether the dog is wagging the tail, or the tail is wagging the dog. Weakening price of oil and copper can indicate a lower demand which would suggest a possible economic weakness.

But shouldn't lower prices in oil and lower interest rates help the consumer and stimulate the economy? That may have been what I thought if yields weren't falling to all time lows this year, because that doesn't just happen for no reason, and we know that we had a yield curve inversion last year (and flirting with another now) so the chances of a recession, or economic slow down, if not a recession, is likely trying to play out. The bond market is trying to tell us this, but we just haven't seen the stock market react to it yet.

Earnings season will start winding down but we could start seeing some coronavirus warnings from companies looking for an excuse if their numbers are down in the first quarter. Apple gave us a bit of a warning on Monday so we'll see how the market reacts on Tuesday. Also, China has been shutting down a number of industries out of precaution. That could devastate their normally robustly growing economy and GDP.

The S&P 500 (C-fund) didn't make another new high on Friday, but there was a slight positive reversal day after opening and closing near the days highs surrounding some intraday weakness. There is some resistance just over head as the index hits near the top of one of the rising trading channels. It looks like today's close could be important as it should determine if that short-term red rising trading channel remains intact.

The DWCPF (S-fund) made another new intraday and closing high on Friday, but it is bumping up against some resistance, which is rising, although just in the middle of the blue rising trading channel so there's room to move on either side.

The EFA (I-fund) was down again as the strong dollar keeps putting the pressure on. There's a lot of resistance in the 69.75 area.

The Transportation Index fell sharply on Friday and the losses pushed it back below the 50-day EMA, and it is now flirting with a breakdown from what could be a bear flag.

Let's keep an eye on the Chinese stock market as the Shanghai Index has slowed down since its powerful rebound off the initial coronavirus sell-off. The 200-day EMA and the top of that open gap could be formidable resistance, so if it can get above that perhaps the sell-off was an overreaction. If not, it could get ugly and the rest of the world will take notice.

The AGG (bonds / F-fund) was up modestly on Friday and remains in a bullish looking flag. It has been trying to do some consolidating since that big rally in January, but it could be getting primed for another breakout. For this to happen I suspect we'd have to see the 10-year yield move below 1.5%, which would be near all time lows.

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

Tom Crowley

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