TSP Talk Blog

The rubber band finally snapped on the two plus week rally in stocks to start the New Year. We saw a move higher at the opening bell following the PPI report yesterday as it, and retail sales, came in weaker than expected. That suggested that inflation is nearly in check, however it is becoming more obvious that the economy is suffering. This has been the Fed's goal with their interest rate hikes so this shouldn't be a surprise, but what is surprising is that the Fed doesn't seem to be considering stopping their rate hikes. The Dow lost 614-points. Bonds were the winner on the day as yields fell sharply on the weak economic data.

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The market has been on this, "bad news is good news" kick but yesterday's weak economic data and the Fed's resolve to continue raising interest rates seems to have changed that thinking. It was just one day and it is an options expiration week when the action can get whippy, but with the indices testing over head resistance, the January bulls finally relented.

After stocks opened higher off the disinflationary data, we heard from the St. Louis Fed President, James Bullard, although he is actually not a voting Fed member. Here's the Wall Street Journal headline:

Fed’s Bullard Sees Need to Keep Up Rapid Pace of Rate Increases
Federal Reserve Bank of St. Louis president suggests half-point move at next meeting would be appropriate

So, bad news turned out to be bad news.

Here's the data from yesterday where the PPI, Produce Price Index, fell more than expected in December, and you can see the year over year decline off the early 2022 highs. Good for inflation. Bad for the economy.



Retail Sales also came in weaker than expected, and you can see the steady decline over the last year, so the Fed is doing their job of slowing down the economy, but with the unemployment rate still near historic lows, they seem determined to keep tightening.

I've been talking about a decoupling of bonds and stocks as the weak economic data should not be good news for stocks, but stocks kept rallying on the weak data thinking the Fed would stop cutting rates. The 10-year Yield closed at a new low yesterday sending bond prices higher and to another multi-month high.




One thing that could give the bond market (F-fund) some trouble going forward would be if congress fails to raise the debt ceiling by the end of the day. They also ways do, but if they don't, things could get ugly everywhere.

As I said, it is an options expiration week, and the bulk of earnings season kicks off next week so a little volatility is expected. The charts have pulled back and they look a little "toppy" as they back off from resistance, but the trends are still up for the month, and we'll have to see if the dip buyers show up before things fall apart again.

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The S&P 500 (C-fund) pulled back sharply yesterday after opening higher and failing at the 200-day averages, and look where it landed. Right on top of that open gap and just 29 points above that key 3900 area that has been in the picture for many months going back further than this chart shows. Yesterday I said, "Now that it is over 3900, I would look for that area, and perhaps 3955, to try to hold as support." Well, it fell through 3955 like a hot knife through butter yesterday but we still have that 3900 area, and the 50-day EMA that could bring in some dip buyers. If they fail, then it could get ugly.




The DWCPF (S-fund) hit a triple top and the 200-day EMA and fell sharply. That could be an inverted head and shoulders pattern, which is bullish, but if a right shoulder is going to form it could come all the way down to the 1630 - 1650 area and still remain intact.




The EFA / I-fund was positive for most of the day yesterday but finally relented in the final hour of trading when the dollar went from negative, to positive. Technically this is still in an uptrend and a pullback seems totally reasonable, but that is a negative reversal candle so a decline to 68 - 69 is possible without changing the bullish look to the chart.




BND (bonds / F-fund) exploded higher as the weak economic data is really stating to roll in, and its' not like it wasn't expected. The trend is up but it did open another large gap near 74, and that could try to get filled in the coming days.




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

Tom Crowley




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