TSP Talk Blog

Stocks started the 2nd half of 2022 with some nice gains as we headed into the 3-day holiday weekend. The Dow gained 322-points, small caps led on the upside, and the I-fund lagged because of strength in the dollar and the late gains in the U.S. market. Bonds are coming back to life as they threaten a breakout to the upside. So the 3rd quarter starts with a nice gain, but it looks like Q2 will end like Q1 with a 2nd negative GDP making it look more like the first half was in a recession so the market has to deal with that - if it hasn't already.

Daily TSP Funds Return More returns

As noted last week, the first day in July has been historically bullish and after a rough start on Friday, it lived up to that billing by closing strong. We had our doubts because of the bear market environment but actually the start to just about every month this year has been pretty good. It's what happened in the days following that has caused most of the problems this year. You can see that there was some bullish activity in the first couple of days to start every month this year, so Friday's rally may not mean all that much. It could just be new money coming into the market.




And if we look at it month by month you can see that buying in that first week of the month probably did not pay off. The buying opportunities came later in the month almost every time except for April which was just bad all month. Does that mean we should be selling any rallies this week?




That would have worked all year, but remember the stat that this was the worst first half of the year for stocks since 1970? Well the second half of 1970 saw a 27% gain, so anything is possible, but the situation is not quite the same.



There are some signs that the market could be ready to make some kind of low, except for one important thing: The Fed remains hawkish. They have made no pivot away from their aggressive interest rate plan and reducing their balance sheets (quantitative tightening.) Couple that with what looks like a 1st and 2nd quarter recession based on the Atlanta Fed's assessment that GDP was down 2.1% in Q2, and the financial system may be in some uncharted territory.

Per GDPNow:

Second-Quarter GDP Growth Estimate Decreases

"On July 1, the GDPNow model estimate for real GDP growth in the second quarter of 2022 is -2.1 percent, down from -1.0 percent on June 30."

The next FOMC meeting isn't until late July and a lot of economic data (jobs report, CPI, PPI, etc.) along with earnings reports will come out in the interim, and if there are any changes suggested such as the Fed wanting to pivot more toward stimulating growth and away from fighting inflation, stocks could take off from there. But that hasn't happened yet.

Should they continue to hike another 0.75% at the late July meeting and say that they won't take their foot off the rate hike gas peddle until either the employment picture weakens or some other evidence that inflation is peaking, then stocks may not have a reason to go up yet.

They're kind of damned if they do, and damned if they don't. Do we want continued high inflation or a weakening economy? Right now we're getting both.

The 10-year Treasury yield fell back below 3% last week closing at 2.89%, and the 2-year yield is moving in sync as it fell to 2.84%, so this will get the Fed's attention as they track that 2-year yield very closely. Another 0.75% hike would push the Fed's funds rate to 2.5%.




Consumer Confidence is at a 50+ year low, down to 50, but one interesting stat from this chart is what the S&P 500 did over the next 12-months when the Confidence finally bottomed from a level below 60 or 70%. It averaged a gain of nearly 25% from that point to the the next peak. It is at 50 now but there's no sign yet that it has bottomed.


Source: https://am.jpmorgan.com/us/en/asset-...market-update/


I can talk bull / bear arguments all day since we have a pretty good setup in many indicators for a good rally, but the market is not going to forget that the Fed is working against it right now so being defensive but nimbly aggressive at times will probably be the best way to play it until we see some resistance broken on the upside and some kind of pivot from the Fed. Meanwhile the buy and holders, who do so well in bull markets, have continued to take their lumps in 2022, and they can only hope things turn around since they never sell.

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The S&P 500 (C-fund) failed last week at the 20-day EMA, which shouldn't surprise us in a bear market, but the open gap near 4000 was such an attractive lure and many thought that could get filled before a reversal down, but it never got that high. Now I see a possible bear flag, although it's not all that clear with only one test of the top of the flag since the low on the 17th. So if it's not a bear flag then it opens the possibility of a higher low, but that won't be confirmed unless it gets back above that June 28 high where it failed last time. And if it does that, the open gap would likely get filled, so we have a fork in the road but the map isn't really clear yet.




The weekly chart of the Dow Industrials successfully tested its 200-wekk moving average (as did the S&P 500) but there is an interesting open gap down below 29,000. That area was an open gap after the initial nose dive Covid crash, and it jumped right above that gap when rallying back just after the 2020 election. Could that be the downside target or will the 200-week average continue to hold?




The DWCPF (S-fund) looks very similar to the S&P 500 chart with a possible bear flag, a failure at the 20-day average, a possible higher low, and an open gap still overhead.




The EFA (I-fund) -- same deal. Open gaps above and another bear flag, and as you can see they have consistently broken to the downside this year.




BND (Bonds / F-fund) was up big for a 3rd straight day, and they are showing signs of ending their downtrend, putting bonds and the F-fund potential back in play. Unfortunately it's not for bullish reasons but rather the most recent recessionary data.




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

Tom Crowley



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