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TSP Talk - The market shrugs off the black swans

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The stock index futures were down very sharply overnight on Sunday night / Monday morning - twice, and both times the losses were recovered. The S&P 500 futures were down about 50-points at the lows, or about 500 Dow points, and by the opening bell we saw just a single digit loss for the S&P, and about 40-points on the Dow, but that was it. The dip buyers showed up and the indices were fairly steady throughout the day, and the Dow closed up 92-points. Trading volume was particularly light for some reason.

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The futures were likely reacting to weekend unrest across the country, but the market shook it off fairly easily and despite record unemployment, most business working at less than full capacity, and now major cities burning, the stock market acted like it was just another walk in the park. Either investors have lost their minds... or there's something big going on under the surface that's not overly apparent. I suppose both are possibilities.

I've had my eye on the Shanghai Index as the chart started to deteriorate several days ago, but they seemed to applaud the fact that the trade deal did not get overturned last week, and despite the tension between China and the U.S., it's sort of business as usual.

Again, are investors being overly optimistic or, as the coronavirus becomes less of a factor, is it just that the world is ready to open up and go back to the old ways? That may take some time but we know the stock market is a forward looking indicator.

The May jobs report comes out on Friday morning this week and we know it is going to be a disaster. Everyone knows it, yet it is a rear-view mirror type of indicator that we know should improve in the coming months, but estimates are looking for a loss of 8.5 million jobs. That's a pretty scary number, and the unemployment rate estimate is about 20%, but who cares, right?

Between COVID-19, the civil unrest, and the upcoming elect, political tensions are heightening and my guess is that we haven't seen the last black swan, and it could be an eventful summer and fall. One concern is that the crowded protests may be a catalyst for another wave of coronavirus cases. The question is whether the stock market will care at all.

The S&P 500 (C-fund) saw an impressive comeback from an overnight selloff and the new month started with a modest rally. Trading volume was unusually light considering that 401K and pension inflows tend to come in this time of the month, so I'm not sure why there was a significant dip in volume, unless investors and traders were not participating much because of the weekend protests.

The DWCPF (S-fund) challenged last week's high after another big day for small caps. The rising support line appear to have held, and the 200-day SMA was broken. This is still an area where a bear market rally can go to die, but the bears haven't done much of anything in recent weeks.

The Dow Transportation Index was flat on the day and is still near the top of its rising trading channel. It also broke a short-term rising support line but the 50-day EMA is not far below to try to support any pullback.

The EFA (I-fund) had a big day and the dollar fell below its 200-day EMA to magnify the gain in the I-fund. It's at the top of its trading channel and bumping up against its 200-day EMA, so that's a concern technically.

The High Yield Corporate Bond Fund also had a big day and it finds itself at the 200-day SMA, where the April rally failed.

The BND (F-fund) pulled back yesterday, but closed well off the lows. It remains above the breakout level of the April highs, but it did close below the recent rising support line. It still looks fine here but a close below 87.50 could be troublesome.

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

Tom Crowley

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