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TSP Talk: Market digests recent gains as catalysts fade

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The market pulled back modestly yesterday as the news cycle gets a little more quiet. The Dow was down 39-points and if you watched the tape during the day you saw that flip from positive to negative more than a dozen times between the opening and closing bells. The Dow actually led the other indices because it has several defensive components that did well like UnitedHealth, McDonald's, and Wal-Mart. Tech stocks took down the broader indices with the Nasdaq and small caps lagging on the day. Yields were down, but the market ignored that this time.

Daily TSP Funds Return
After Wal-Mart's successful quarterly report and rally on Tuesday, Target reported disappointing earnings yesterday and it fell about 13% on the day setting the tone for the rest of the market which, after jobs reports, CPI, PPI and FOMC meetings recently, is looking for the next catalyst.

The dollar and bond yields were down but this time the stock market indices did not use that as an excuse to rally.

The yield on the 10-year Treasury was actually down sharply but the problem is the shorter term bond yields are holding or moving up so we have yield curve inversions all over.

The 2/10 year yield curve is now at its steepest level of the year and the steepest in decades, so rather than improving, it is getting worse and investors noticed yesterday.

Even the 3-month t-Bill yield is paying more than the 10-year Treasury Yield right now.

As are the 6-month and 1-year T-bills.

This generally means that a recession is brewing, although historically it can take up to two years between a 2/10 yield curve inversion and the start of a recession. The 2/10 chart up above first inverted in April of this year, and then again in July and has been inverted since. It's tough to conclude that this means nothing.

Again, only judging by history, the stock market has never bottomed between the yield curve inverting and the start of a recession. In other words it is very likely that we will see lower lows, below October's low, at some point between now and whenever a recession is upon us.

Can we avoid a recession? Of course, anything is possible, but history suggests otherwise.

In the meantime we are getting close to the stronger seasonal period of the year so in the short term we could see some continued rallies, but if you remember 2018, December isn't a guaranteed winner.

The S&P 500 (C-fund) was down yesterday and it has been holding in that 3950 area for three or four straight days. After failing at the 200-day EMA on Tuesday, it is back in that wedge / bearish looking flag so it is flirting with trouble if it can't get back above 4025 soon. The open gaps above and below the current level are quite large and technically, the one below goes from last Wednesday's close of 3749 to Thursday's low of 3860, or 111-points. Can that possibly be ignored?

The DWCPF (small caps / S-fund) fell back into its bearish looking flag and it is now pointing at its huge open gap between about 1570 to 1630. Again Last Wed.'s close to Thursday's low.

The EFA (I-fund) held up rather well as the dollar was down. It's above the 200-day EMA after failing at the 200-day simple moving average on Tuesday. There are gaps all over this chart so it is possible that it could do some backing and filling.

BND (bonds / F-fund) was up again as yields have dipped yet again. The bear flag is trying to break to the upside but it may not be time to bet on bonds as this may be where the bond bears make another attempt to push this lower. The gap created by the CPI was either a game changer for all of these charts, or they are all going to try to get filled.

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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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