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TSP Talk: The rotational rally continues

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Stocks were mostly higher on Friday while bonds pulled back. The Dow gained 165-points and led on the upside with a 0.48% gain. Large tech, and more so the small caps, lagged on the day, but all the TSP stock funds added about a percent and a half of gains last week. Bond yields look ready to move higher again and that could be a test for stocks this week.

Daily TSP Funds Return

Internally we saw weakness in the Nasdaq and strength in the NYSE on Friday so the rotation rally continues as investors move money from one area of the market to another, rather than outright selling. Along with the sharp decline in the VIX in recent weeks, it could be a sign of complacency, but it's tough to say when that will become an issue for the market.

The recent pullback in yields has helped stocks, but the chart of the 10-year Treasury yield may be suggesting that the uptrend in yields may be ready to resume, if that 50-day EMA holds again as it has done for months. The stock market may not mind a move higher in yields unless it is an acculturated move like we saw off the late January low.

Not coincidentally the S&P 500 pulled back to its 50-day EMA a few times when that yield was rallying, and has basically gone into melt up mode since the yield peaked in late mid to late March.

So that's what investors may be watching this week - whether the 10-year yields rallies off that 50-day EMA, which it started to do on Friday, as well as getting into the meat of earnings season.

I'll be on the road again on Monday heading back to my office so I may not be available after the TSP deadline again. I'll catch up on correspondence later in the evening.

The S&P 500 (C-fund) has been relentlessly moving higher since the last time it tested its 50-day EMA. It is overly stretched by almost every measure and while momentum usually lifts things longer than we think is reasonable, caution is probably warranted because it won't go on forever. As I mentioned above, the yield on the 10-year could be the catalyst this week. If it starts to bounce back we could start seeing some backing and filling here.

The DWCPF (S-fund) is moving higher in a two steps forward, one step back kind a way. In two of the last three days we saw big early rallies fail by the close. It's above that resistance line now so we could see a push to the recent highs, but again if yields start popping again, small caps could be the hardest hit.

The EFA (I-fund) blasted through another rising wedge pattern (blue) and is nearing the top of that longer term channel (red.)

The Dow Transportation Index hit another intraday high on Friday but it is showing some short term signs of fatigue with that negative reversal candlestick which can precede modest pullbacks as we saw a couple of times in March . It has closed below that rising channel now for three straight days - another possible warning.

BND (F-fund) fell back into the bear flag, and that actually makes me feel better. If you recall on Friday I was so perplexed why the strong economic reports sent yields down sharply (bond prices higher) and why the bear flag broke to the upside, and above the 50-day EMA. This move down makes more sense. Bond traders are shrewd and it make have been a smoke screen on Thursday.

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

Tom Crowley

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The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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SPY (C Fund) (delayed)

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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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