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TSP Talk: A wild February comes to an end

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Friday's action was fitting for the end of the wild month that was February. The Dow lost 470-points on the day, but 300-points of that came in the final 5 to 10 minutes of trading, and the S&P 500, which was up a solid 23-points with less than 5-minutes to go in the trading day on Friday, plummeted 41 points in those final minutes to close down 0.48%. It was the final trading day in February, which could have had an impact, but it seemed to have more to do with investors being nervous about what was going to happen over the weekend. Small caps and the Nasdaq held onto some gains.

Daily TSP Funds Return

Despite the two week pullback, we did see positive returns in the TSP stock funds for the month, while bonds took a big hit, but the S&P 500 / C-fund is now only up 1.72% for the year. Small caps continue to outpace the large caps, and the loss in the I-fund on Friday pushed it below the C-fund for the year. Bonds are down for 2021, but could be due for some relief if we see yields pullback from their recent spike higher.

This could be one of the most important junctures for the markets since the election as we see a change in character in several areas of the financial system. Bond yields have been moving higher - and quickly. It's not that a 1.5% or 1.6% yield is high compared to historical norms, but the rate of change is giving money managers something to think about in a way that we haven't seen the Fed cut rates to 0% and sent the money supply into absurd levels in an attempt to save the economy.

The yield on the 10-year has been below 1% since last March when the COVID crash hit the markets. It hit a low of 0.40% and had hovered well below 1% for most of 2020. A move from 0.5% in August to 1.5% last week may not seem like much, but that's triple the return for those looking for some safety and stability, while stocks start to get more volatilize.

The question is, can it continue higher? Technically, this current level may be near some resistance as it approaches the 2019 lows and the 200-day EMA. If the resistance can old, and yields peak in this area, the stock market may find some relief from this recent two week pullback.

The dollar is suggesting that something may be different as we saw the head and shoulders pattern breakdown, reverse back up and break above the descending resistance.

The pop in the dollar over the last two trading days had its impact on commodities. We saw copper come off its recent parabolic move. Oil, not shown, was also down $2 a barrel or 3.2% on Friday. And obviously stocks have felt some pressure, particularly the I-fund which is very sensitive to the movement in the dollar, as it lost 1.55% on Friday.

The two week pullback in the S&P 500 brings a test to the markets this week. We've only seen one three week plus losing streak over the last 16 months. That was in September of last year. We'd have to go back to the fall of 2019 for the prior three week decline. Since then there were six 2-week pullbacks, and 5 of those 6 saw gains in the following week (blue arrows.) So here we go.

The futures just opened as I am writing this and I see a lot of green.

The S&P 500 (C-fund) fell through the 50-day EMA on Friday, but like the final day in January, held into the close. It also held at the bottom of that parallel rising trading channel (red.) The bulls are hoping March starts like February, which ended the January pullback. That seems to be the technical story heading into Monday's trading.

The DWCPF (small caps / S-fund) has been dancing above important support as well.

The EFA (I-fund) has struggled with the recent two day rally in the dollar. It has fallen to the 50-day EMA, which held for the most part in late January, but there is a double support line near 73 that may look for some attention.

The Volatility Index stayed above that 200-day EMA, but below Thursday's highs. Investors may be able to shake off this modest spike, but if it heads back to the January highs, we'll likely see some breakdowns in the index charts.

The BND (bonds / F-fund) rebounded on Friday with the reversal in yields to the downside. The downtrend resistance line was broken so perhaps a relief rally back up to test of the 200-day EMA (blue) again is possible. The indicators are quite oversold after the drubbing that bonds have taken in 2021.

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

Tom Crowley

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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