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TSP Talk: Strong economic data sends stocks up... yields down?

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Stocks moved higher on Thursday after a couple of very strong economic reports were released - initial jobless clams and retail sales. However the futures were rallying most of the night before so there must have been something more to it. The Dow gained 305-points and while the rally was fairly broad across many indices, internally it was suspect. Small caps battled back from some early losses to follow through on Wednesday's relative strength. Bonds had an interesting rally with yields dropping on strong economic data? That's odd.

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Once again we are seeing some negative divergences in the market breadth. The Dow gained 0.90%, the S&P 500 was up 1.11%, and the Nasdaq jumped 1.31%. Small caps did well (S-fund up 0.92%), and the Equal Weighted S&P had a solid day gaining 0.78%. Great day, no? Advancing issues just narrowly beat declining issues on the Nasdaq, and there was more down volume than up. On the NYSE it was better on the up vs. down issues, but a toss up on the up / down volume. I try to bring you useful information but these divergent days, which are normally warning signs for stocks, haven't really meant much recently so I feel like the boy who cried wolf. It could just be more rotation into those high priced tech stocks where fewer shares rising impacts the indices more than lower priced shares falling, but there's more of those lower prices shares out there.

While we're at it, I still haven't heard a good reason why yields plummeted after two strong economic data reports yesterday? It doesn't make sense. Did the Fed do something I wasn't aware of? I honestly don't get it, but what I get is that the chart is down testing the 50-day EMA again, and it may look to bounce off it like it had done two prior times, which the stock market may not like. I heard one guy on CNBC say the drop in yields (rally in bonds) could have been just a short-squeeze since there were many people short bonds. But that happening yesterday, a day with strong economic data, seems odd.

The sharp drop in yields helped out anyone holding the F-fund right now as we saw a very big move there, as far as moves in the F-fund go. Like the oil chart on Wednesday, we saw another bear flag break to the upside in the BND bond chart. What's going on with these flags?

There are some geopolitical rumblings near the Russia / Ukraine border, and in the Middle East right now that could shake things up in markets if something starts up there.

I'll be on the road on Friday but will stick around at least until the TSP deadline in case we have any changes to our premium service allocations.

The S&P 500 (C-fund) was up 1.11% yesterday pushing it to another level of new highs. The strong economic data helps, but perhaps it would have not have done so well if yields rallied instead of falling. I still don't get that. Since the S&P last came down to test the 50-day EMA in the middle of March, the index has rallied 325-points, while the 50-day EMA rallied 100-points, so it is getting quite stretched again.

The DWCPF (S-fund) had a good day but it was interesting to see the Russell 2000 struggling and down early so once again the midcaps led, and a rally in oil may have helped. The resistance line was broken again so let's see if it can confirm that with a few more days above that red line.

The EFA was up yesterday, and the dollar was down, which is a bullish combination for the I-fund. A new high was made so I guess the overseas market also liked our economic data?

The Dow Transportation Index was up modestly but that's two closes below the rising trading channel. No damage really done yet, but a 3rd close below it would be a first since this rally began.

The VIX closed at its lowest level in over a year at 16.57. It looks like complacency when compared to the 2020 and early 2021 numbers, but it's actually more in line with normal readings before COVID.

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Thanks for reading. Have a great weekend!

Tom Crowley

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