TSP Talk Blog

Stocks were mostly higher on Tuesday after Monday's one day pullback, but there was a sharp dip in the middle of the day that was quickly bought. The Dow, which was both up and down triple digits at different times during the day, closed at +60-points. The S&P 500 was basically flat but small caps jumped again as they continue to lead on the upside. The I-fund was up as the dollar fell, and bonds were down slightly after a successful test of the November lows.

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There weren't any major economic reports released yesterday but the economic growth trades were the ones working best yesterday. And of course that trade is feeding off of the stimulus and the potential for more, which is what has been sending the dollar down for months, and when the dollar is down we see prices go up. Small caps have certainly benefited, as has prices in commodities. Oil is not only up on that weak dollar, but investors are also betting on increased demand in 2021. It broke through the top of its channel this week.




Economic strength also tends to lift bond yields (bond prices falling) but yesterday there was a possible negative reversal as the yield on the 10-year shot up over 1.18% at one point before pulling back and closing at 1.14%.




BND (bonds / F-fund) saw a positive reversal after it successfully tested the October lows.




The question is, does that negative reversal in yields / positive reversal in bonds, indicate anything negative about the economy from the bond traders? With the yield on the 10-year reading near the March highs, when stocks were plummeting, what does that say about the current environment?




I wish I knew a bond trader to pick their brains about this. I know yields tend to go up when the economy is growing, or when inflation is moving up. What would a double top pullback in yields do to the stock market?

Next Monday is MLK Jr.'s Day and here is the seasonality chart surrounding that holiday. That's quite a bit of red for a month that is fairly green in general.


Chart provided courtesy of www.sentimentrader.com

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The S&P 500 (C-fund) slipped back into the rising trading channel during yesterday's midday selling, but by the close it had crawled back above that resistance line. That is now three days above resistance and surprisingly strong action for an index that should be running out of steam at some point here.




The DWCPF (small caps / S-fund) isn't running out of steam, but it probably should be. Not only is it up over 100% since last March's lows, but it has now gone up up 35% just since the low before the election.




The EFA (I-fund) was up with the dollar down on the day. The trading channel is still holding.




The dollar took a pretty big hit yesterday after the solid three day rally.




The Transportation Index, another that is quite sensitive to economic activity, was up sharply yesterday, making a new high. The Dow Theorists would suggest that this is a good sign for the broader stock market.




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

Tom Crowley



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