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TSP Talk: Another morning rally fails... badly

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Once again someone flipped a switch after a very positive morning and it turned into a sell the rally afternoon. The Dow, which was up over 450-points at the early highs, ended the day down 313-points. There wasn't a whole lot of news to trigger the move, but as we've been talking about, investors and money managers will use rallies to sell and / or reallocate their portfolios for a higher interest rate environment. Bonds were up a bit even though the 10-year Treasury yield ticked up again. The dollar rallied on inflationary news out of Europe.

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This type of action can trigger some give up / capitulation like selling, which can lead to a more meaningful relief rally. Not that a relief rally will necessarily create a bottom in the market, but perhaps a more playable bounce, unlike these 3 hour rallies that we have been seeing fail quickly.

After the bell Netflix (NFLX) reported earnings and did what we had feared in Tuesday's commentary which was guide lower for the next quarter. It's not uncommon for companies to use the obstacle of the day to lay bad news on the public. Higher interest rates is a great excuse if you don't see your company performing as well in the upcoming quarters. Netflix was down almost 20% in after hours trading, and that should put more pressure on the Nasdaq today.

Peloton (PTON) was also crushed as they reported that they will halt production of their exercise equipment to keep from building up too much inventory with sales falling. Their stock was trading down about 25% yesterday, so things are getting ugly in some markets.

The 10-year Treasury Yield was up a little, even when stocks were rallying in the morning, which was interesting and goes to show how oversold some stocks had gotten. The market would prefer to see yields ease a bit, but even if they do, the new trend is up, and that will be a problem for the stock market as it prices in the higher rates that are on the Fed's agenda.

The dollar was down early but some talk out of Europe about inflation over there helped push it up and ended the day with a decent gain.

The rally in the dollar did put some pressure on prices as we saw oil turn a new high into a minor loss yesterday, and except for copper which has been building a long-term bullish looking base, the metals (gold and silver) also gave up some ground with that reversal in the dollar.

Lumber had been booming again but, perhaps a result of the strength in the dollar, broke its recent rising trading channel yesterday.

Bottom line, we see higher consumer prices all over including commodities which bleeds into many areas of the economy like housing and auto markets.

If you bought during the sell off in the first week of January, you probably have some regrets right about now. That is unless you sold after that brief relief rally in the 2nd week. If you did, you have a pretty good start to the year avoiding some losses. But you would also be out of IFTs to be able to buy this recent sell off, which may be getting a little long in the tooth. Not that stocks will bottom here, but a more meaningful relief rally is certainly on the horizon - whether that starts today, next week, or in February, it's difficult to gauge. Timing it is the equivalent of trying to catch the proverbial falling knife. It could hurt if you're wrong.

Today is an options expiration Friday and the volatility recently has made options / futures contract strike prices fast moving targets after the recent sell off. That makes for an interesting day today as large traders try to unload some potentially big winning or losing trades before they expire, which could trigger even more volatility as they push the market in their direction.

The S&P 500 (C-fund) is in an unsustainable descending trading channel right now, testing the lows from early December. I say unsustainable because the angle of decline is too sharp and narrow. Can we crash from this? Yes, but that doesn't seem too likely given the nature of this decline which is because of rates and not a calamity or economic crisis. Even if inflation gets out of hand, that would send prices higher, and stocks could go along with that. They may be "worth less" if the value of the dollar declines with inflation, but the prices could still be higher, if that makes any sense. It's like a $20,000 salary in 1980 was probably worth more than a $50,000 salary today. Higher price, less value.

The DWCPF (small caps / S-fund) took another node dive after the big morning rally failed. Support has been taken out so we see some capitulation selling here as investors start giving up on trying to call a bottom. The 50-day EMA just moved below the 200-day EMA and that is a bearish sign, but often when they cross it comes when the charts have gotten oversold, and due for a relief rally. But in general, those types of rallies should be sold.

The EFA (I-fund) has been pulling back with U.S. stocks and the rally in the dollar put more pressure on it yesterday, however it is still holding up a little better than the C and S fund, and that may be because of the dollar peaking back in November / December.

BND (Bonds / F-fund) was up slightly but the fundamental picture for the F-fund looks bearish, but like any other chart, it will have some relief rallies along the way.

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Thanks for reading. Have a great weekend!

Tom Crowley

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