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TSP Talk: A mostly bullish mixed Monday

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The stock indices were mixed yesterday, with the Dow dipping 36-points, while the S&P 500 (C-fund) and small caps of the S-fund both pulled in some healthy gains. The small caps of the Russell 2000 were actually flat so they lagged, and that means the midcap stocks led the S-fund higher. The Nasdaq, and particularly the large cap tech stocks of the Nasdaq 100 Index, led the way, and that was intriguing since yields were up, and the Nasdaq has been a little nervous about those rising yields recently.

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The action in the Nasdaq was surely curious as there were a lot more stocks down in the index, than up yesterday. But as we have seen often, the widely traded larger cap tech stocks, where all of the volume is, was very positive. Also, there were a lot more new 52-week lows yesterday on the Nasdaq than new highs.

On the NYSE the up / down issues and volume ratios were actually slightly negative, but basically flat.

Normally the big tech Nasdaq stocks shy away when yields are up, which they were yesterday, so perhaps it was because the 10-year yield flipped over to close well off the highs, because the Nasdaq was actually down in early trading. The "F" flag continues to play out here. They do tend to break to the downside, but there's no rule, that I know of, that gives us clues to how long that F flag can move higher before it does break down - if it does.

We know oil is at a new high but other commodities are also flying, as you might expect in an inflationary environment. The 5-month pullback in copper has nearly completely recovered its losses in just the last 8 trading days. That's how quickly things can change.

The gold bugs have been talking about this - the speed at which inflation can kick in - and about the Weimar Republic for years and how quickly their currency was decimated after WWI. It was obviously an anomaly triggered by their inability to pay their debts after the war. Here's a quick synopsis from Wikipedia.

"In the early post-war years, inflation was growing at an alarming rate, but the government simply printed more currency to pay debts. By 1923, the Republic claimed it could no longer afford the reparations payments required by the Versailles Treaty, and the government defaulted on some payments. In response, French and Belgian troops occupied the Ruhr region, Germany's most productive industrial region at the time, taking control of most mining and manufacturing companies in January 1923. Strikes were called, and passive resistance was encouraged. These strikes lasted eight months, further damaging both the economy and society.

"The strike prevented some goods from being produced, but one industrialist, Hugo Stinnes, was able to create a vast empire out of bankrupt companies. Because the production costs in Germany were falling almost hourly, the prices for German products were unbeatable. Stinnes made sure that he was paid in dollars, which meant that by mid-1923, his industrial empire was worth more than the entire German economy. By the end of the year, over two hundred factories were working full-time to produce paper for the spiraling bank note production. Stinnes' empire collapsed when the government-sponsored inflation was stopped in November 1923.

"In 1919, one loaf of bread cost 1 mark; by 1923, the same loaf of bread cost 100 billion marks."

So if we keep spending and printing at the current pace, the outcome is inevitable, but the timing is not.

Lumber is another one that has recently spiked as it is up 72% since August.


But of course lumber has been on a crazy rollercoaster ride for the last year and the 72% gain looks like a blip compared to the one year chart. But again, it shows us how quickly prices can change and if it happens on a broader scale it could be quite a catastrophe.

That's nice scare tactics and it may not be realistic to try to predict it happening anytime soon, but on the slight chance that the December debt ceiling deadline (which Yellen says it would be near December 3) comes and goes without a resolution, that's precisely what could happen.

The debate is whether this current spike in inflation, while unsavory to the wallet, is bad for the stock market or not, because the weaker the dollar gets, the more buoyant prices get, and that could include stocks prices in anything that benefits from rising interest rates, like the banks.

Right now economists are saying that the consumer has money and they are spending freely, which is great for the economy, but at what point do elevating prices slow them them down?

The S&P 500 (C-fund) posted a 4th straight day of solid gains as it races toward the late summer highs again. New highs would be par for the 2021 course, but again we have more open gaps below that could easily get filled before we see new highs. However, the angle of the incline looks like a "pole" and generally we see consolidating flags off of them that lead to upside breakouts, so it could be a battle between filling the gaps, and a strong bullish flag with only some sideways consolidation off of it.

The DWCPF (S-fund) pulled back early on Monday but it found support at the top of the open gap, rather than continuing lower to fill that gap. that means filling the gap is still on the table as a possibility in the short-term. It hasn't been overly apparent, but the Russell 2000 has been lagging the last couple of days but so far that hasn't bled too much into our small caps fund.

The EFA (EAFE Index / I-fund) was down on the day, most likely because of the early weakness in the U.S. stocks. By about 11:30 AM ET, most of the overseas market are closed, which was right about the time that the S&P 500 went positive on Monday.

The BND (bonds / F-fund) was down down as the lower high watch is on for this beaten down fund.

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

Tom Crowley

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The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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