TSP Talk Blog

Once again we saw some buying late in the day but it wasn't enough to push the indices back into positive territory after a sharp post-lunch decline. The Dow lost 313-points and we saw 1% losses in the big three indices, while small caps, the overseas markets, and the Transports all saw losses near or above 2% on the day. Bonds were also down sharply as yields keep rising into today's Fed interest rate decision.

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The spike in yields set the tone yesterday, and my double top theory for the 10-year Treasury Yield did not come to fruition and so far all we saw was a three day pause near 3.5%. Now it has broken out above last June's highs. The question is whether this is a temporary overshoot due to the impending rate hike that is coming, or does the bond market really pricing in even higher interest rates going forward? It has been the Fed following the bond market so bonds don't follow the Fed. Doing this for so many years has made me skeptical of a lot of what I see and this could be a play to get investors leaning the wrong way in bonds.



You can see what the breakout in yields has done to the BND chart (F-fund) as it flirts with a breakdown. Normally I'd say this looks like a good place to get into the F-fund but that breakout in yields makes me hesitant. However, we could see a different story in the days after the Fed meeting.

This top chart shows the 2-year Treasury Yield, which moved above 4% briefly yesterday, but settled at 3.96%. This is what the Fed has been following. The Fed Funds Rate is currently about 2.33% and that should go up just over 3% later today if they hike 0.75%. With the 2-yea at 4%, it may be telling us that the Fed has more to go, and they probably will say that, but they may slow down their increases to 0.50% and 0.25% in the next FOMC meetings.



If the economy starts to slowdown, we could see the 2-year yield rollover quickly, and that would be an interesting situation for the Fed.

I'm just throwing in this 40+ year chart of the 30-year Bond yield and you can see that a long, long trend of falling yields has been broken this year.




The Transportation Index gave back all of Monday's gains yesterday, and then some, putting it back to the neckline of the large head and shoulders pattern, and leaving that large gap open near 13,500. If the Fed says the right thing today, we could see that gap get filled, I suppose, but it could also cause the H&S pattern to breakdown, as they tend to do. I still have a downside target on this of 11750, or about 1000 points below the neckline.




In the "As goes Apple" drama, Apple bucked the trend yesterday gaining more than 1.6% yesterday following a positive headline, but some of the other "FAANG" type stocks are not holding up so well. We actually saw monster caps Microsoft and Google make new 52-week lows yesterday, so what led on the way up for years, may start leading on the way down as the bear market looks for new leaders for the next bull market, whenever that comes.

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The S&P 500 (C-fund) erased Monday's gains with a 1% loss yesterday. There's a lot of overhead resistance here but Fed days can be wild and the reaction could go either way. Perhaps we'll get a reaction that fills the gap near 3800, which is the next level of support on this chart. Or, maybe they say something dovish and the market applauds with a big rally. Either way, we probably shouldn't completely trust today's results, but rather let the week play out and see which way the indices go once the noise is out of the way.




The DWCPF (S-fund / small caps) is also below a lot of key support, which may now act as resistance. There isn't an actual open gap but sometimes "stealth gaps" can have the same effect. The space between the close on July 18 and the lows on July 19 could be considered an open gap. That gap is down near 1600 and it could be a draw. There's also a gap near 1675 so... call it in the air.




The EFA (I-fund) fell 1.7% yesterday and followed the bond market below its June low. The sticky dollar remain near recent highs continuing to put the pressure on here.




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

Tom Crowley



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