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TSP Talk: Stocks explode because... Good question!

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Stocks exploded out of the gate on Thursday because... well, that's a good question. The PPI report came in slightly better than expected, but nothing earth shattering. Bank of America reported strong earnings, but they are not normally market movers. Yields were down, which excited the tech sector, but is there anyone on the planet that thinks yields will be lower over the next 6 months? The Dow gained 535-points and we saw nearly 2% gains in several indices. Bonds rallied with yields down.

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The PPI (Producer Price Index) came in lighter than expected (0.5% vs. 0.6% expected), which was a bit of a relief for those monitoring inflation. Yields were down on this, as you might expect, and the Nasdaq snapped back on that news since tech stocks are very rate sensitive. The interesting thing is that the year over year PPI was up 8.6% so it wasn't exactly a good number, just a tenth below estimates.

The CPI came in higher than expected on Wednesday, although the core CPI was not so it was perhaps a mixed messages as investors try to figure out if the economy is strong or withering a bit. You can see what is happening to prices in each.

So the inflationary data is clearly on the rise, and that justifies higher yields, yet the yield on the 10-year has fallen hard over the last three days triggering a big rally in the stock market. But if they reason they are falling is because of the light PPI, a mixed CPI, and consecutive weaker than expected jobs reports, should we be celebrating or running scared, because that's the definition of stagflation - a stagnant economy with rising inflation.

Thursday's rally surprised me and caught me off guard, and while I got a taste of the gains in the TSP funds, I certainly wasn't positioned for a move like that. The question now is whether to chase a continued rally or be patient and wait for a pullback.

I won't explain these charts because it is really grasping, but check out the current chart versus 2007 / 2008. Some similarities:

Today is an options expiration Friday so the action isn't always predictable - as if it ever is. Pre-expiration week has a positive bias and that has certainly kicked in over the last two days, but the week after expiration Friday tends to have a more bearish bias.

Admin note: I will be traveling today after the TSP deadline so you may not be able to get in touch with me after that. I should be back online in time to do the TSP Talk AutoTracker update in the evening, and to respond to any emails. Sorry for any inconvenience.

The S&P 500 (C-fund) blasted through the 50-day EMA (exponential) but I noticed that it is right near the 50-day SMA (simple), and there could be some sellers in this area, although we didn't see any signs of that on Thursday. Also, there was a small gap filled that I will show in a close up in the next chart.

Was this partial open gap, now filled (blue), an upside target for a relief rally, where the 50-day SMA was sitting, or can it blow right through it? Also, there's a new open gap below near 4375.

The DWCPF (S-fund) also gapped up, and that's a 20-point gap. There's some resistance at yesterday's highs but it blasted right through the descending resistance line. Another up day and it will be flirting with its highs again.

The EFA (EAFE Index / I-fund) gapped up and gained 1%, but you can see where it ran into trouble - if we want to call a 1% gain trouble. It looks good, but the 50-day EMA and the open gap are just overhead.

The BND (bonds / F-fund) ran through some tough resistance, and while the chart looks to be trying to improve, only a weakening economy can probably save it at this point. It was due for some relief.

The Dow Transportation Index ran right through that tough resistance rather easily so it is really trying to look like it is bottoming. Is this a fake out, or is this long downtrend finally going to break for this market leader?

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Thanks for reading. Have a great weekend!

Tom Crowley

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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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