TSP Talk Blog

Stocks added onto Monday's gains with another tremendous rally and an 825-point gain in the Dow. We saw the power of bear market rallies this week, but can the market really flip a switch that easily despite very limited evidence that things are getting better? If anything, the market rallied on bad news in the hopes that the Fed will stop raising interest rates. Stocks, bonds, gold, silver, oil, etc., were all up on the day, while yields and the dollar were down.

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The market doesn't make it easy on market timers, especially those with strict trading limits and deadlines. If you were on the sidelines and out of IFTs in September, you would have missed Monday's big rally. Then you had the decision on Monday morning whether to buy that big rally in a bear market, and if you didn't, you missed a 2-day 5% plus gain in the stock funds. Now, if you want to chase this rally, we have some reasons to believe that the upside has some limitations based on where some of the charts landed yesterday.

The argument for a short-term oversold bounce was there and we probably need to respect the potential of a bear market rally, but the argument that stocks are going to new highs is almost impossible to conceive, although never say never.

Right now we have a market that is rallying on some extreme conditions, but also on bad economic news. Yields and the dollar are falling sharply from their recent parabolic moves higher, and the reason they are going down is because the economic data is showing the weakness.
In this environment investors are celebrating bad news, not good news. Monday's rally was helped out by an ISM manufacturing report that was weaker than expected. The JOLT jobs data, which looks at new job openings, came out yesterday and it was down further than any other time on record, except just after Covid.

The Fed is raising interest rates, they are selling bonds in their quantitative fighting program, which is a complete reversal of what we had almost the entire time from 2009 through the beginning of this year. And we still have an inverted 2/10 year yield curve. Can we ignore this?

And, to make matters worse, earnings season is coming and estimates have not completely adjusted for the jump in inflation and higher interest rates.

Did I mentioned the geopolitical factor where the Russia / Ukraine war is on the verge of escalating and some of Europe may have to deal with the fallout from possible tactical nuclear weapon strikes, should that happen? How about North Korea firing a missile over Japan the other day?

So, while stocks were very due for some kind of bounce after the losses in August and September, jumping on the bullish train for more than a playable bounce may be premature. Maybe I'm wrong and the data and earnings will emerge that send the Fed packing and stock prices higher. But for now I am looking at this as an oversold rally in a bear market. The question is, how far can it go, and if you missed it so far, is there any meat on the bone left?

This chart of the EFA / I-fund is a good example of a great rally in a poor chart. It is actually a near perfect example of a head and shoulder breakdown, and a relief rally back to the neckline. Technical analysis suggests this could be a resistance area.



Now, if this rally can continue perhaps momentum will push this up to 61, but descending resistance and the 50-day EMA are in that area, which could stop the rally in its tracks.

There's a lot of enthusiastic talk about the yield on the 10-year Treasury falling sharply recently, but it went up so fast that it is now only where it was back on September 22, and the market was hating 3.6% back then.



The dollar has also backed off which helps prices, but it too is back to support after filling a couple of open gaps.

So, this rally looks good but maybe some of the catalysts aren't as good as many believe.
We'll get the September jobs report on Friday morning and the estimates are looking for a gain of about 250,000 jobs, and an unemployment rate of 3.7%. Remember, good news may be bad news, and bad news may be good news.

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The S&P 500 (C-fund) gapped up adding another 3% to Monday's big rally as investors fall all over themselves to get into this oversold market. The charts are trying to improve but there is some work to be done. Volume is still tepid at best and as I keep suggesting, the lack of a sustained volume spike on the way down normally indicates that we need more of a washout before we see a bottom. There is no rule about that but it is a strong tendency. 3800 and 3900 are potential resistance areas should the rally continue. I put a blue box around some similar action from back in June. That preceded some volatile up and down days over the next month before the rally took off.




The DWCPF (S-fund / small caps) is also testing some serious resistance in that 1625 area. This about where a head and shoulders breakdown bounce would come up to, so let's see how much this has left. If it does keep going, perhaps there's more going on than I know about.




The BND (bonds / F-fund) was up modestly, flirting with some descending resistance between 72 and 72.50.




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

Tom Crowley



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