TSP Talk Blog

After trying to rally early on Thursday, stocks tanked on the Bloomberg News report that the Biden administration is planning a capital gains tax hike to as high as 43.4% for wealthy Americans. The indices went south in a hurry and the Dow, which was struggling to stay even just before the headline, closed down 321-points which was about 100-points off its lows, but a free fall from the 1 PM ET high. There were loss of near 1% in many indices, but the small caps held up better.

Daily TSP Funds Return More returns

Bonds were up as yields fell, presumably on the idea that tax hikes could impact the economic growth. The dip in yields was fairly muted so much of the movement in stocks could have been a knee-jerk reaction, but like interest rates, taxes are right there as one of the most important catalysts for the stock market, so we'll see if the selling will stick, or if it just brings in another wave of dip buyers. The chances of a tax hike actually passing in the Senate isn't likely so this may just be for show.

The internals were negative on the NYSE as you'd expect, although that's taking into consideration that the indices spent half the day in positive territory with much better positive breath. The Nasdaq was just slightly negative in issues and volume breadth.




Stocks have obviously been on a tear recently and near all time highs, and valuations often don't seem to matter as much in a strong bull market as we've seen. Algorithm trading builds the upside momentum and leads to more of the same as it feeds on itself. But with inflation becoming a concern as the value of the dollar continues to slide with the sharp spike in both government spending and the M1 Money supply, the Fed may have to eventually act on rates to hold that in check. But when stocks hit a road bump people get nervous and may even stop and look at those valuations, which for years many pundits have been banging the table about for a long time.

One pundit we've talked about before is John Hussman of Hussman Funds, who tends to sound the alarm, often way too early, when this is the case, but every several years he's right, and the market has a serious correction or bear market.

Here's what he's looking at now - along with many other charts and data you can find in his link above. This is a chart of the price of the S&P 500 divided by the revenue of the stocks in the index, going back 30 years. Basically it says, the S&P 500 hasn't been more overvalued during that entire time, than it is now.


Chart source: https://www.hussmanfunds.com


Where on that chart we should be, I don't know. I suppose it depends where we are in the business cycle. Perhaps coming out of last year's recession, we should be be fairly high on the chart, but anytime you're at the point of being the most overvalued in 30 years, you'd have to think something is going to have to give.

Intel reported earnings after the bell on Thursday and was down in afterhours trading. Not the bellwether it once was, Intel still gives us a pulse of the all important semiconductor industry, which has been pulling back from its all time high made three weeks ago.

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The S&P 500 (C-fund) has been chopping back and forth for several trading days. There were some big down days in there, but the rallies have been big as well so it sits just below those all times highs. Unfortunately, those all time highs are pushing right up against a lot of resistance, albeit rising resistance. I keep mentioning that open gap near 4025, which is one reason I like to see gaps get filled quickly, so we can stop worrying about them.




The DWCPF (S-fund) was down, but just slightly. It did give back a big early gain, and like it's interesting to see that kangaroo tail negative reversal stick out just as it was trying to breakout above resistance again.




The EFA (I-fund) was down with the rest of the market indices, after it attempted to rally and fill in that overhead gap but got swatted back down. That old resistance line near 77.70 looks to be the key support area now.




The Nasdaq Composite is either creating a nice looking bull flag, or it's a rounded top below the prior highs. I would lean toward the bull flag except for all of those gaps that are still open below and need filling.




The VIX spiked up to 20 again and settled about where it closed on Tuesday, reversing Wednesday's loss. The downtrend seems to be over, and the question is whether it is just going to flatten out or start another uptrend.




BND (F-fund) ticked higher after the tax hike headline. Tax increases can stall economic growth, which tends to push yields lower, and bond prices higher. The reaction was muted and it stayed right in that trading channel, so I don't make too much of the move.




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Thanks for reading. Have a great weekend!

Tom Crowley


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