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TSP Talk: Monday acted more like a Turnaround Tuesday

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It was looking like we could have some kind of black Monday in stocks when the opening bell rang yesterday, but the lows of the day were made within about the first 30-minutes of trading, and the buying, which you can't always trust if it starts too early, persisted into the close. We saw mixed but mostly negative returns yesterday (although the Nasdaq was green) but the 2% to 3% rally off the lows was impressive. Yields were up again, but they closed off the highs so bonds were down just modestly.

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These type of positive reversals are generally bullish for stocks over the short-term, but a pullback right back down to test the lows wouldn't be out of the question, especially with the Volatility Index (VIX) near 20 right now. That would be a big disappointment and probably send a lot of people running. I'm not saying that will happen, but being the paranoid person I am after trading and investing for so many years, I expect the market to try to get as many people leaning the wrong way as possible. Absent of that paranoia, the charts indicate more upside could be coming.

The yield on the 10-Year Treasury moved up but came well off the highs giving a somewhat negative reversal look which could precede a dip, and that would give bonds a relief rally, but the F-fund is not something I am too interested in this year.

The dollar was up moderately but it too came off its morning highs. It is closer to the bottom of its recent channel and continues to hold at the 50-day EMA.

Some charts broke down yesterday before the positive reversal and that was a little concerning, but some charts found support right where we'd want to see them do so. Here's three charts that I was watching yesterday.

The Real Estate ETF XLRE had been very hot in 2021 but once we got into 2022 it flipped right over. Yesterday it hit the rising support line and bounced enough to have it close back above its 50-day average after breaking below it earlier.

The second chart is the semiconductor index SOX, and it also closed back above its 50-day EMA after a successful test of the December lows.

The S&P 500 Equal Weighted Index (same 500 stocks as the S&P 500 but all stocks are weighted the same) hit the 50-day EMA and bounced like someone walking barefoot on the sidewalks on a summer day in Las Vegas. There is an open gap down near 155, so even if the bounce continues, there's always that possibility that it could get filled down the road.

Yesterday I talked about the importance of the direction of the Nasdaq 100 and its impact it has on the S&P 500. The early sell off yesterday was certainly an eye opener and it may have negative ramifications down the road, but the Naz 100 actually closed positive yesterday, gaining back a near 3% morning loss, so that's impressive and a nice reversal to catch a bounce, yet possibly a warning for the market down the road a bit as a possible test area for the next pullback if we get some kind of relief rally first.

On Wednesday and Thursday of this week we'll get the CPI and PPI reports respectively. These price reports are of major importance right now because they are a key source of inflation data, which the Fed and investors are watching very closely, and will impact the decision making process on interest rates.

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The S&P 500 / C-fund was down slightly but clearly that was a good loss after battling back from an early 2% decline. It closed back above the 50-day EMA after falling below it at the open. From here we tend to get two possible outcomes. A continued rally that leaves underinvested people behind and forcing them to chase to get in -- or another deep pullback that retraces yesterday's reversal, but it generally brings in those buyers who did not get in at yesterday's lows. Both are good outcomes, but are short-term possibilities only. Longer term it remains to be seen if the uptrend is starting to falter, as we've seen in other charts like the small caps.

The DWCPF (small caps / S-fund) completely broke down below those December lows keeping its downtrend alive. The positive reversal was a good short term sign, but again, it could just be a relief rally with all of that resistance still above between 2175 and 2225.

The EFA (I-fund) fell below the 50-day EMA and closed there, but it too posted a positive reversal. The early strength in the dollar didn't help, but the dollar did weaken as the day went on, helping with the EFA's positive reversal. The rising channel is still intact but I would feel better about this fund if it can get back above that 50-day average.
The I-fund lagged because of the late rally in U.S. stocks.

BND (Bonds / F-fund) reversed up but closed with another loss, making it 7 down days in a row for bonds. Due for a bounce, but a very ugly chart. 2021 was not the year of the F-fund, and I doubt 2022 will be either.

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

Tom Crowley

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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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