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TSP Talk: Stocks finally exhale for a day

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It was another rotational day for stocks yesterday as the indices were mixed yet again. We saw early gains fade and some indices did well while others suffered. The Dow gained 54-points, which was almost 200-points off the highs, and the Nasdaq lost 1% (1.3% on the Naz 100.) On the other hand the small caps of the Russell 2000 rebounded after a week or so of pulling back.

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The market continues to hold up, but the rotation continues, so one day the S&P 500 leads on the upside and maybe small caps are down, and the next day small caps are up and large tech is getting hit hard. In a way that's bullish in that investors keep looking for a place to put money rather then just sell everything and go into hiding.

Of course you can look at it the other way and say there isn't enough interest in the broader market to lift all boats. Has sentiment gotten so extreme that no one is left to keep buying? The theory goes that stocks tend to peak when everybody is bullish, because there's no one left to buy. Everyone is in already, and the drying could be drying up.

But most of the indices are at or close to all time highs, and it's hard to argue with success. The question is, have the main concerns for 2021 been priced in and addressed by the market? That is, the risk of inflation, interest rate and yield hikes, and the fact that taxes are likely to be raised on corporations and some individuals? These are not minor considerations. Taxes and rates are everything to the market, so keep that in mind when you see new highs in the indices.

Yesterday the internals were actually better than the indices indicated with the NYSE having a 2 to 1 advancing volume over declining, and that was because the companies that get the most attention, large tech, got clobbered yesterday, so it was the Nasdaq that saw the more negative breadth.

The dollar was down, as were bonds and the F-fund with yields pushing up slightly.
Small caps did well because two catalysts for the Russell 2000 are oil refinery companies, and small regional banks, and yesterday the price of oil, to my surprise, broke to the UPSIDE of that bear flag I have been concerned about. I assumed it would break down, as bear flags tend to do. Also, the first wave of bank earnings reports were solid pushing the XLF up on the day, so again, good for the small banks in the Russell 2000.

The midcaps, which have been helping our S-fund avoid some of the Russell 2000's recent losses, lagged yesterday when the S&P and Nasdaq started to rollover, and that's why it was flat on the day. But as you can see, it had a negative reversal day and a failed breakout at the important resistance line.

We did get the IPO of Coinbase as we discussed yesterday, and it did just OK because it closed well off the frenzy high of the day. And, maybe not surprisingly, bitcoin was down about $1000 yesterday. Not that bitcoin is necessarily peaking, but some profit taking off the IPO hype is typical.

The S&P 500 (C-fund) backed off from the top of its rising trading channel and it did barely break below that narrow, short trading channel (blue), and that may open the door to an attempt to fill that open gap, although that is a premature call at this point. The momentum from the bulls may try to prevent that from happening, but it would sure make it an easier area for those looking to buy if we saw a meaningful pullback to repair an over-extended chart.

The EFA (I-Fund) broke out above the recent highs, but closed right on that breakout line creating a negative reversal pattern in the process. The 78 and 77 areas were the key breakout areas on the way up, and they remain as important support now.

The Dow Transportation Index has barely blinked since coming off that late January low. Two and a half months of upside action is getting excessive, and yesterday's action, which was actually a small gain, pushed the index below that support line that has held firmly the whole time - except for two quick dips.

BND (bonds / F-fund) was down slightly and, drum roll please, it remains in that long bearish looking flag for yet another day. It's been the same story for the last several weeks.

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

Tom Crowley

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