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Stocks opened higher again on Friday and it it looked like the bears were doing nothing to push back on that. At least that was the case with the three main large cap indices, especially the Dow which gained over 1% on the day -- although Goldman Sachs alone accounted for a large part of that gain. I was on the road after the first couple hours of trading and when I got to my destination I was a little surprised to see the small caps completely reverse direction and close down on the day, while the other indices closed near their highs. Something changed. The dollar was down helping the I-fund again, and bonds were also down.

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The yield on the 10-year Treasury rallied back after a three day pullback, but that didn't seem to put the pressure on the Nasdaq like we had been accustomed to seeing. This chart has created an "F" flag and that channel can continue for a long period of time, but when F-flags do break they tend to be to the downside. Why that would happen, I don't know, but I'd speculate that it would be some kind of shock to the economy. Again that's just speculation based on chart patterns.

And why would the economy slow down at this juncture of the recovery? I don't know but GDPNow from the Atlanta Fed has moved Q3 GDP down yet again.


Latest estimate: 1.2 percent — October 15, 2021


On October 15, the GDPNow model estimate for real GDP growth in the third quarter of 2021 is 1.2 percent, down from 1.3 percent on October 8.




Just a minor tick lower, but this was over 6% in July. Of course this is now rear-view mirror data since the 3rd quarter is over, but it is still going down, and if you recall the S&P 500 peaked on September 2, just about when these estimates started to tank. Oh, and a reminder that the government no longer posts GDP numbers for some reason so if not for the Atlanta Fed, we may not even know.


But then there's this...

As we talked about last week, the year over year rise in the CPI (Consumer Prices) was the highest since January of 1991. That's bad, right? Well, look what happened to the S&P 500 after January of 1991. That bull market ran right into the dot com bubble 9 years later.





So, perhaps the stock market doesn't care since it seems to be more about earnings and momentum, but can earnings and momentum remain strong if inflation (CPI) is growing faster then the rate of the economy (GDP)?



The dollar was down on Friday after breaking down from what looks like some kind of small rising wedge. There's some support near 25.16 and there's an open gap near 25.10 so there's room for a pullback.




The price of oil closed at a 7 year high on Friday and that's generally a good indication that the economy is doing well, but shutting down pipelines is also a contributing factor. The question is, at $82, when does it start to hurt the consumer? I know I just finished a road trip and there was some sticker shock when i saw how much it costs to fill up the tank these days.

Plus, with winter close at hand and natural gas prices up as much as heating oil, perhaps consumers won't have as much spending power over the holidays. Add to that the issue with the supply chain and retailers trying getting goods on the shelves in time for the holidays.

So, with the stocks market indices climbing back toward all time highs, I have to wonder how this will play out over the coming months. I would think stocks would be struggling but I suppose we shouldn't question why it is going up, but rather ask why isn't it going down? There seems to be a lot of roadblocks but the market doesn't seem concerned and it tends to have a predictive element to it, meaning if stocks are going up, there's probably a good reason. Either that or the big money is trying to lure everyone in again before the next take down begins, but that's the paranoia in me, and I've been burned by that before.

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The S&P 500 (C-fund) spent the last three days of last week blasting off as we have seen a few times in recent months. Unfortunately the prior three times gave us three different results in the following week. One went sideways for a couple of weeks before rallying again (July). One continued higher for another week before peaking (August). And the one in September rolled right back over right away. I would give the advantage to the July move since that was also earnings season, just before the FAANG stocks started to report. We'll start to see them reporting next week.




The weekly chart shows bottoming action, but also some possible resistance just below the early September highs.




The DWCPF (S-fund) had a funky little negative reversal on Friday, despite the large caps closing at their highs. I think ideally, if this is going to eventually break out to new highs, it may want to fill in that open gap near 2240 first, just to clean things up a bit. Will it, is the question. It is near the top of the range that has been holding all year long and each prior time we saw another pullback toward the bottom of the range.




The EFA (EAFE Index / I-fund) chart is usually riddled with gaps but as you can see, they almost always get filled (blue gaps) eventually. The red ones are still open and there is one overhead and three down below. It opened up another gap on Friday, but it also closed above a descending resistance line and the 50-day EMA in the process.




The BND (bonds / F-fund) flipped back over after testing the top of that second bear flag and closed back below the 200-day EMA, so this looks like the downtrend may continue. It it does happen to turn back up, we could be seeing a bullish inverted head and shoulders pattern, but yields would have to flip back down for that to happen, and why would yields go lower unless the economy is not as strong as we think?




The Dow Transportation Index gapped up on Friday after some strong earnings were reported in the sector. This clearly looks like a breakout from its downtrend, and this could be the best sign of all, if it can keep moving higher. The Transportation stocks are as economically as any index. This may have been moving down with the signs of a slowdown in GDP, but it could be also front runner a 4th quarter recovery? Remember, the supply chain issue is all about Transportation so this is a good sign.

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

Tom Crowley


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