TSP Talk Blog

We woke up on Monday morning with the futures mostly flat, as it had been during most of Sunday's overnight session. Then, out of nowhere, stocks took off, probably the last thing most investors were expecting as the S&P 500 approached some serious resistance. The Dow gained 254-points, and once again the broader indices performed even better. The recently hot I-fund and F-fund lagged yesterday as rallies in the dollar and yields put the pressure on them.

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This action could be a tease to suck people because as you can probably see everywhere, people are bearish. Very bearish. If you're listening to the TV pundits, or almost any stock market news, YouTube videos, etc., people expect earnings to be weak, inflation to be resilient, the economy to suffer as interest rates go up. You name it, it's being talked about and it is scaring many mom and pop investors out of stocks.

Is it justified? Maybe, but it isn't common that the market does what everyone is expecting, and that's why this recent rally is a surprise to so many people, and that feeds on itself as many bears are forced to buy and move into the bullish camp. They call that a short squeeze.

Then, once they've convinced us all that things are actually good and we've overestimated the bearish side, they're likely to pull the rug out from under us again.

What's the solution? Being nimble / flexible and fading extremes has been working. The indices have been very choppy in recent months and buying sharp declines and selling big rallies has been working. We've seen the S&P 500 go above and below 4000 many times over the last 9 months. It got up to 4300 over the summer and just below 3600 at the lows in October, but up and down it goes. It closed yesterday about where it was in early May, and several other times in between.



At some point that will change and a new trend will emerge, but we have to wait to see either a breakout or a breakdown before we'll know.

The move above 4000 is a positive development but getting above 4100 looks more important. While I am in the bearish camp for the year because of the threat of recession, in the short term I wouldn't be anymore surprised by a rally back up to 4300, than I would a move down to below 3900 again. I'm willing to trade the extremes until a more definite trend develops.

Yields and the dollar were up yesterday but both remain in downtrends and bearish patterns as the 10-year Yield builds a head and shoulder pattern. The direction of the breakout in these two could determines the next bigger move for stocks, and more obviously bonds. Bonds move in the opposite direction of yields, and stocks tend to perform better when the dollar is declining.




Internally it was another very positive day yesterday, particularly considering the flat open on a Monday. Share volume was decisively in favor of the advancing stocks than the declining. 5 to 1 in the Nasdaq as tech has caught fire in front of earnings reports. Is this "buy the rumor" action setting up a "sell the news" reaction when earnings come out?




Microsoft reports after the bell today kicking off the big tech earnings releases - if you don't count Netflix as a big tech company. But ironically Netflix's earnings report did trigger the start of Friday's rally in stocks.

Bitcoin has been very strong recently going from 16,500 to over 23,000 this month alone and, as much as crypto-currencies are not major factors for the stock market, the wealth effect of a 40% gain in crypto could be giving the stock market it's "risk on" mentality.

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The S&P 500 (C-fund) rallied and poked its head above last week's highs after that sharp pullback early last week. Can this hold, is the question as 4000 and 4100 are key levels that investors are watching closely. The fact that it closed above both the 200-day simple moving average and the 200-day EMA could trigger some program trading buying. Of course it has to hold these levels and that's no guarantee.




The DWCPF (S-fund) led the way yesterday as investors have the "risk on" mentality to start the week. It closed above its 200-day EMA for the first time in a long time, but you can see where that puts it - right at the neckline of the head and shoulder pattern that we talked about yesterday. It's a make or break area.




The EFA / I-fund has been lagging the last few days but it still has the most bullish looking chart having made new highs a couple of weeks ago. Backing and filling is not a surprise, and even a test of that 69 area wouldn't be a bad thing, but if US stocks are rallying while this is going on, this may not be the short-term fund choice. However, it could all change in a day if the dollar turns down again.




BND (bonds / F-fund) fell below the first support level which was the prior highs near 74. That's not a deal breaker. As we talked about above, the yield on the 10-year T-note is in a bear flag and if that does eventually breakdown, this chart should resume its upside trajectory.




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

Tom Crowley



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