TSP Talk Blog

Stocks ran out of steam after the recent explosive rally off of last week's lows. We saw losses of 1% to almost 3% on the day, depending on the index. A test of the lows after a sell off is not uncommon, although it has been in 2021. It's almost refreshing to see things playing out in a more typical fashion. The question is whether a test of the lows will hold, or if the end of the uptrend is upon us. Bonds were down (yields up sharply), and the dollar rallied, which meant trouble for just about everything.

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What's all the fuss about? Rapidly rising yields, supply chain troubles, inflation concerns - which the Fed confirmed yesterday. Oil and gas prices are flying high, although yesterday's sell off lowered all boats. Labor shortages, the debt ceiling deadline next month, and a possible government shutdown on Friday. Other than that, things look pretty good. Nothing new, but the market ran out of dip buyers and the bears had a day.

The question many on Wall Street are wondering about is if the rising yields have more to do with inflation or with the growth in the economy. The difference is big.

The Atlanta Fed GDPNow continues to lower their 3rd quarter GDP estimate, which is now 3.2%, so perhaps earnings and prices are being adjusted accordingly and that is what we are seeing play out in the market in September. The good news is, the 3rd quarter is close to being rear-view data as the quarter ends tomorrow, and the 4th quarter starts on Friday.



The 10-year yield hit 1.57% yesterday, which isn't very high, but it's a lot higher than it was early last week, and it's the pace of the rise in yields that has investors concerned. Technically it reached up to an area that had an open gap back early June, and that could be meaningful as that was about the high yesterday. A little backing and filling of some of the gaps opened in the last few days could settle things down.




The dollar had a big rally and broke through to new highs for the year. That's actually a very bullish looking chart and a 6-month consolidation, and if the Fed start to taper their bond buying, we could see a major move higher, but I don't think a strong dollar is the major concern for the country. Spending seems to have no limits and this strength may be short-lives while investors re-allocate for the tapering.




Oil looks like it is facing some resistance at a double top as the price flirts with the early July high. Even the recent strength in the dollar couldn't keep this from moving up $14 off the August lows. If the dollar does flip back over, we may wish for $75 oil again, rather that $85 or $95 that we could see if the dollar does fall again. Eventually that would weigh on stock prices. Like yields, are higher oil prices because of economic growth or inflation?




We will not get the September jobs report on Friday despite it being the first Friday of the new month. It will be released next Friday.

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The S&P 500 (C-fund) rolled over after its strong relief rally. At this point everyone is watching to see if a test of the lows and the 100-day EMA will hold, or if we're in store for another lower low, which would confirm a lower high and potential change in trend. There's something different in the air, but betting against this market, and not buying dips, hasn't been a good strategy this year.




The DWCPF (S-fund) continued to struggle at that red resistance line, but it has also been holding firmly at the rising support line (blue), which has held all year long. There was an open gap below 2200 in August that did get filled last week. The close rested on the top of that gap, but sometimes meaningful gaps can draw continuous attention, and in this case the bottom of that gap is adjacent to the rising support line, so that will be a key area to watch (2190.) A fill of the gap followed by a reversal would be a very bullish move.




The EFA (EAFE Index / I-fund) was down more than 2% like almost everything else yesterday, and the -1.79% in the I-fund may be kind given the rally in the dollar. There were a lot of gaps filled and opened in recent days. The blue boxes are filled and the red boxes are still open and potential targets.




The BND (bonds / F-fund) plummeted with yields rising. This time it fell through the 200-day EMA. If that was a bear flag, then we may have seen the downside target hit already. That doesn't mean it can't go lower, but from a technical standpoint, the flag may have run its course.




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

Tom Crowley



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