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TSP Talk: A dip in stocks as yields tick slightly higher

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Stocks pulled back on Monday with the Dow losing a modest 123-points, which was well off the lows, but we saw more serious losses in the Nasdaq and small caps as bond yields started to rally back. The market needed a rest and the question is whether any decline will be a pause to consolidate, or an outright pullback or correction to perhaps clean up some of the over extended charts.

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I was on the road most of yesterday and didn't get a good feel for the action, and I got home a little too late to put together a full report. Obviously there was some selling as we have been anticipating for little longer than I'd like to admit during this recent push up in the indices, but this has been due. The question is, how severe or benign will it be?

Because I was gone I will post just one chart down below today, but it's basically what I am watching now - the S&P versus the 10-year treasury yield, and the dollar. I'll leave Monday's commentary below that in case anyone missed it. Thanks.




The S&P 500 (C-fund) chart shows how extended it has gotten as far as pushing against most short to longer term levels of resistance that can be draw from one week ago, to three plus years ago. The weekly chart in Monday's report down below shows that one.

I'm watching to see if the yield on the 10-year Treasury is ready to curl back up and make an attempt at new highs. That would certainly get the stock market's attention and put pressure back on the Fed to change its plan.




And the lower chart is the UUP dollar ETF chart, which gapped lower and the downtrend continues to be relentless since the late March high. A falling dollar can help to keep prices higher, but that also brings on talk of inflation.

Below you will find Monday's commentary which will go into more detail about this situation.

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

Tom Crowley

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04/19/21
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.




Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

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

Tom Crowley




Posted daily at www.tsptalk.com/comments.php

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