TSP Talk Blog

The stock market threw the world a curveball on Friday, something it really likes to do. After some of the most disappointing earnings that Amazon ever reported were released after the bell on Thursday, along with a mediocre at best report from Apple, the futures dropped like a rock, but the market had been in rally mode most of the week and they were able to thrust the indices higher again on Friday instead of what could have been an earnings crash. The Dow gained 829-points. The TSP stock funds were quite mixed with varying degrees of gains from 0.70% to 2.47%. Bonds were down as yields went up again, and the dollar also rallied making it even more confusing.

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In a nut shell, poor earnings all week saw stocks rebound sharply and that was likely triggered by the Wall Street Journal article a week ago regarding a possible pivot from the Fed. We've seen that before and it hasn't worked out well yet for the bulls this year, but that doesn't stop the rumors from coming.

There was also an inflation related report on Friday morning, the PCE report, which the Fed follows and in came inline with estimates, so that also seemed to help trigger the rally.

Technically yes, the rally could have further to go than the 12% move off the recent lows. Fundamentally it's a tougher argument. Even the one two punch of higher yields and a stronger dollar on Friday, which have been an anchor for the stock market all year, could stop that runaway rally on Friday off of poor earnings reports. Are we being duped to get us leaning the wrong way again? I think so. That's the way it works. As they say, markets can remain irrational longer than you can remain solvent. Or they could stop on a dime once we've all bought into the rally talk.

The 10-year Treasury Yield moved back over 4% on Friday and it looks like the support line has held, at least for another day. The trend has been - yields up, stocks down. Same with the dollar.



The UUP dollar ETF also rallied, which has been a thorn in the side of the stock market, and from a technical point of view it is not a stretch to see a bull flag fully formed. Or was the rally just filling in an overhead open gap? Either way, a strong dollar should put pressure on stocks so we'll have to see which way it goes this week as we head into the FOMC meeting.


The rally in the Nasdaq and big tech stocks stoked the flames on Friday after the big rally in Apple, but now this weekly chart is facing some possible overhead resistance at the much followed 200-week moving average. If it can get past that, perhaps the long-term descending resistance line (red) could be an upside target, but a lot could happen along the way.




I was looking at the action in the charts recently and decided to compare some bullish action from late 2008 to the current chart of the S&P 500. They look pretty similar, huh?



But here's what happened in 2008 after that big rally up over 900 back then. The S&P 500 eventually bottomed at 666 about three months later, falling another 27%.




This chart shows the 2022 year to date S&P 500 with the Federal Reserves interest rate hikes noted by the blue arrows. As we might expect, it almost always triggered a big day in one direction or the other, or both, but unfortunately there was no real consistency on which way stocks went from there. In March and July we saw big rallies afterward. In May and September stocks went straight down.




I spent a lot of time this weekend looking for clues regarding the next move so I am kind of throwing a hodge-podge of information at you. One thing I noticed is what is happening in the Hong Kong stock market. This is not a small market and it is a part of the I-fund. It has fallen well over 50% from the highs from back in 2018. It is now in an area that it traded in back in 2008, and during the dot com bubble days, and before that as far back as 1997. So basically a buy and holder who bought the Hang Seng Index in 1997 may be at break even with that investment right now.



I bring this up because there is no rule that stocks have to go up. The Japanese Nikkei Index has still not gotten back to where it was in 1989.

We can only hope, but probably shouldn't assume, that something like this doesn't happen here in the US, and inflation and rising interest rates would not be the formula for new highs. Excess government spending is certainly part of the blame for the problem, and it has been going on for a long time. What happens if they stop the pace of spending? In the long term it could do great things for the financial condition of the US, but in the short term there could be a of of pain. That means politicians probably won't have the fortitude to stop spending since this is how most of them have pined for votes for decades.

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The S&P 500 (C-fund) is tagging some possible resistance near 3900, which is the neckline of one of the head and shoulders patterns that it fell through back in September. If Friday's momentum can roll into this week, than that resistance would get taken out, and then the next obvious resistance area would be in that open gap, which is right where the 200-day EMA line is crossing. But as I talked about above, sometimes the obvious place is the least likely area for a target.




The DWCPF (small caps / S-fund) has similar issues and opportunities with open gaps above, but immediate resistance where it closed on Friday, at the top of that bear flag, which is also at a descending resistance line off the August highs.




The Dow Transportation Index was up nicely on Friday, although the 1.5% gain lagged the S&P and Dow. It is above the bear flag now, but surprisingly Friday's rally could not move it above the Wednesday and Thursday's intraday highs.




The rally in the dollar on Friday held back the EFA / I-fund as it only gained 0.70%. There could be some payback today if stocks don't rollover in the US.


BND (bonds / F-fund) made a bold move above resistance last week, but it was actually down on Friday when yields went up again. I see a possible situation where we could see a meaningful move above 70 and into the mid-70's, but if the Fed continues to insist on raising interest rates without pausing, this could rollover again.




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

Tom Crowley



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