TSP Talk Blog

Despite the Dow slipping 60-points, looking at the broader S&P 500 and Nasdaq returns below, it looks like a very solid day for stocks. Not so much, but if we're being paid by the return of the entirety of the indices and not by the individual stocks in them, does it matter if internally the market is weakening before our eyes? Yesterday the initial jobless claims report came in weaker than expected, and on that news bonds were up after another dip in yields, and the dollar seems to be following along as weak or strong inflationary data remains the catalyst.

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On a day where the S&P 500 and the Nasdaq saw solid gains with both closing at an all time high, we saw some carnage under the surface. We've seen this before and it can go on for a while, but it generally means a pullback, correction, or even a bear market is bubbling under the surface, while the major indices get held up by the tech giants that account for a large portion of the return of the indices.

The internal numbers were very negative yesterday - a day that saw new closing highs. The Nasdaq doubled Wednesday's total with 410 new 52-week lows on Thursday. New highs? I'd say be careful as this type of data can precede large corrections - or sometimes it doesn't. Not every Hindenburg Omen warning precedes a market crash, but almost every market crash has been preceded by one of these warnings. Being that we are heading into late November we know the seasonality is on the bull's side, but that's no guarantee.




The 10-year Treasury Yield pulled back for a second day after hitting some resistance. The weaker than expected jobless claims indicated a possible easing of economic growth...




... and the dollar did the same. The formula seems to be clear. Strong data means a higher dollar and higher yields because of the potential for inflation. Softer data pulls the dollar and yields down.

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What that means for stocks may depend on the sector. As you can see in these charts below, the S&P 500 closed at a new high and looks poised for a possible breakout. But the RSP chart of the Equal Weighted S&P 500 (same 500 stocks but not weighted by market cap) shows more weakness and a failed breakout this past Tuesday.




It may be too early to make that call but we're all looking for clues for the next bigger move. This certainly confuses things since the small number of large cap stocks that dictate the direction of the S&P 500, which is our C-fund, may not be telling the full story about what is happening.

While the C-fund is tracking the 500 stocks in the S&P 500, the S-fund tracks an index of roughly 4500 stocks. Some of which are doing well, but many are struggling as we see in the market breadth and New Lows data.

Update: Since posting this on Thursday night, the Congressional Budget Office estimate came up with the deficit figure on the Biden budget so now it goes back to the House for a vote. The S&P 500 futures moved up afterward on the news. I don't know if this is a game changer or a selling opportunity at this point, because there is more work to be done before it passes.

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The S&P 500 (C-fund) closed at a new all time high despite not quite hitting the previous intra-day highs. It looks like it could be some kind of a flag formation but the internal data may be suggesting a fake out is coming. The recent sideways action helps push it off the most overbought levels and allows the moving averages to get a little closer to the indices, but it is still quite extended with the index now 155-points above the 50-day EMA, and about 440 points above the 200-day EMA.




The DWCPF (S-fund) lagged for a second day as it does not get the benefit of those high flying large tech stocks. The open gaps are still looming below, but that could be a big bull flag forming above the resistance line (blue) from the top of the old trading channel.




The EFA (I-fund) was up after a second consecutive down day in the dollar. That looks like a positive outside reversal day, albeit a small version, but it must hold above the bottom of that red box or it could go the way of the early September breakdown.




BND (Bonds / F-fund) enjoyed a second day of gains and as we talked about on Thursday, it looks like it may be trying to form the right shoulder of a head and shoulders pattern. Unfortunately a head and shoulders pattern in a downtrend tends to break to the down side so any further upside in the right shoulder could be a selling opportunity. If it can rise above the 50-day EMA perhaps it can void the H&S, but that could only happen if yields keep sliding, and I'm not sure why that would happen unless the economy is in trouble.

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