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TSP Talk: Favorable PPI - trumps Russian missile attack

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The market gapped up again on Tuesday after the release of a better than expected PPI report. It turned out to be a volatile day but the bulls won out in the end with the Dow gaining a modest 56-points, while there were much bigger percentage gains in the broader indices. Wal-Mart rallied strongly after reporting earnings and that also lifted spirits as the bulls try to put the 2022 bear market behind them. Yields and the dollar were down helping prices move higher.


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It was a battle of the headlines yesterday. The day started with another favorable inflation indicator as the Producer Price Index (PPI) was lower than expectations, and stocks gapped up in a similar fashion to what happened last week when the CPI came out. About midday yesterday there was another headline that Russia had sent missiles into Poland and quickly most of the morning gains were erased. That had not been confirmed but it shook things up a bit in the market anyway. By the close, the market mostly dismissed the Russia news, although the indices never did make it back to the morning highs.

The bear market rally is reaching some make or break levels, similar to the summer rally which eventually failed, but this one is heading into a favorable seasonal period. That may give it some more room to run, but the charts would have to get above some tough resistance to keep going higher from here.

The bond market took advantage of both headlines. The weaker than expected PPI (less inflationary) sent yields lower / bond prices higher in early trading. But by early afternoon bonds were drifting lower before the Russian story broke and there was a modest run to safety. At the same time stocks went lower, but by the close we saw buying in both stocks and bonds. This is an intraday chart of Tuesday's action the bond market (upper) and the S&P 500 (lower.)




The yield on the 10-year Treasury was down and it is trying to hold above its 50-day EMA, but it's interesting that it has been doing so despite a plethora of news that inflation may be peaking. If the CPI and PPI reports weren't able to push it below that area of support, it may take a Fed action to do so.




One really good sign for the stock market has been the strength in one of the major market leaders, the Dow Transportation Index. It has pushed through several layers of resistance since bottoming at the October lows. This is generally thought to be a good sign for the broader market indices which are lagging this chart.




The weekly chart of the S&P 500 traded below the 200-week EMA for about a month but since it has pushed back above it, the bear market has quieted down quite a bit and the bulls have taken over. This is not a bull market yet, but it is getting intriguing. The next obstacles on this chart are the 50-week EMA and the 40-week simple average, both of which are near 4050.



This chart tells me that the rally was a serious one, but there is some work to be done because the longer-term trend is still down. The battle going forward will be between positive seasonality that starts in about a week, and a bear market rally that could run out of steam as it approaches some tough resistance.





The S&P 500 (C-fund) has hit 4000 for three straight days but it has yet to close above it. That said, the 4050 - 4100 area look like potential targets, although the 200-day EMA swatted back the index yesterday after it hit the 4020's. Bottom line, we have a lot of positive momentum that is on a collision course with bear market resistance, so something is going to have to give.




The DWCPF (small caps / S-fund) has broken above its bear flag, and in a bear market, that is saying something. You can see some obvious resistance in the 1750 area, although whenever something looks obvious, I look for the other options as having a good chance of happening. That is, it could blast through 1750, or it won't get there. Either way I think we will have frustrated market timers.




The EFA (I-fund) continues to climb above additional resistance levels, which was what I was talking about above with the small caps. The three open gaps below are certainly still in the picture on any pullback off these recent highs, so in this case the market will either punish those who will try to be patient by not pulling back for them, or it will punish those who are chasing and buying the breakouts above resistance.




BND (bonds / F-fund) was up yesterday as the cool PPI report sent yields lower, and the news out of Russia gave investors a reason put money in a safe haven like bonds. Like the flags on the stock charts, the bear flag here is not acting very bearish either as it tests the very upper end of the range.




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

Tom Crowley




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S&P500 (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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