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TSP Talk: Inflation concerns creep back in

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Stocks buckled on Monday and fundamental analysts might blame it on the ISM report that came in hotter than expected, while the technical analysts were selling the indices at resistance levels after another long bear market rally. However you slice it, stocks were down sharply with the Dow shedding almost 500-points, and many indices have given up most of that Fed driven rally from last week. The dollar and yields were up on the strong economic data report.

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The battle is on between economic data coming in showing strength, and a hawkish Fed who is does not really want to see evidence of strength in the economy, lest they have to continue to raise interest rates aggressively. Of course the alternative is weak economic data which would help the interest rate situation, but also suggest that a recession becomes more likely. So right now the market seems to be in a no win situation, and still being in the midst of a double digit rally, the only hope may be a seasonal Santa Claus rally later this month, unless the Fed throws the market some kind hail Mary pass.

Last Thursday I complained about Jerome Powell's prior day speech where he hinted at a slower pace of interest rate hikes, and stocks rallied dramatically that day. In that Thursday Commentary rant I said, "This seems to happen often enough that I do become paranoid that these moves... are designed to get us "dumb money" to lean the wrong way, and / or do the wrong thing."

Well, I didn't buy that rally (although I was in a short position that got crushed) and I could see on the AutoTracker that many people did buy into that rhetoric, and that's why these pivot / no pivot comments or articles that we see are really designed for other people - usually the big money - to take money away from other smaller traders. Of course some of it may be accurate, but because of all of the inaccurate or misguided info that we get, it seems to do more harm than good most of the time to folks like you and me.

We will have to deal with this again next week when the CPI report comes out on the 13th, and the Fed announcing another interest rate hike and policy statement on day two of their FOMC meeting on the 14th.

Yesterday we saw some economic data, the ISM Manufacturing Index, come in stronger than expected and that triggered some inflationary concerns, so yields and the dollar moved higher and the reflex move to that this year has been to see stocks move lower.

The Transportation Index was down more than 3%, and judging by where it ended the day, today could be a very important pivot point as the rising trend line and the 200-day EMA are meeting to form important support near 14,000. This is a key market leader and Wall Street will be watching those support lines.

This week will most likely be a shuffling act from investors and traders positioning themselves for next week's market movers - the CPI report and the FOMC rate hike. The market could get jumpy on every economic headline in the interim.

The S&P 500 (C-fund) has been consolidating in that rising channel and it is testing the lower end of the channel again, and with the 200-day moving averages now overhead, something is going to have to give. December is usually a bullish month for stocks, but not necessarily the first week or two of the month, and of course next week the CPI and Fed will take complete control of the market, so it will be interesting to see if we get a catalyst that breaks down the channel, or if the overhead moving averages give way, before next week. As always, we can't rule out a fake out in one direction that gets reversed after next week's catalysts.

The DWCPF (S-fund) is also within a rising trading channel and testing the lower end, as well as the 50-day EMA. This one looks more like a bear flag than the one on the S&P 500. There's also open gaps above and below that are large enough to warrant some attention. My prediction is one of those red gaps will get filled by the close next Wednesday. That's not exactly going out on a limb.

The EFA (I-fund) was down and the weakness in the dollar didn't help. But once again the EFA outperformed the US stocks. The channel looks stronger here than the US stock fund chart, but that open gap down near 62 shows us the potential target of a downside sell off, and that's a long way down. Technically however, this one is behaving a lot better right now.

BND (bonds / F-fund) was down sharply as it fell below the overhead rising resistance line. We have the same situation here the trend being up but that CPI gap is open from last month and they are always potential pullback targets if the trend breaks down.

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

Tom Crowley

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The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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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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