TSP Talk Blog

The stock market has been on a role and Friday's rally took some indices up to, and beyond, the early December highs, recovering those nasty December losses. We did see a little steam come of the rally in the final half hour of trading on Friday, but the Nasdaq and small caps ended the day with impressive gains again. The I-fund lagged as the dollar moved up, and bonds (F) were down slightly.

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This week, and into next, may be the most important for the market in 2023. We head into this week three months or so off the October bear market lows. The move off those lows since is reaching the limits of being able to be called a bear market rally, meaning any further upside and we may have to start using the term "bull market" to define what's going on.

The arguments against a new bull market are that we haven't seen a typical high volume capitulation sell off that typically creates a bottom for the market. We have higher interest rates that are probably going a little higher. We have earnings estimates falling because of the economic slowdown caused by higher interest rates. Although it has been decreasing, we do have higher inflation than we have had for a few decades. We have a typical "sell the news" set up with the rally into earnings. Also, a lot of the buying is being done by bearish investors who were short the market (betting against it) who had to buy back in to get out of those short positions, especially if they are getting margin calls from their brokers. This is known as a short squeeze.

So there are reasons why the market could flip back over, but the selling in 2022 may have been pricing all of this in already, and that's the dilemma. We know a recession is possible this year but we've known that for a while and the market has been pricing it in.

On the bullish side, a large majority of investors came into this year expecting the worst, which mean they probably weren't overly invested and had a lot of cash on hand. That is ammunition for a rally, and of course we saw that for the entire month of January.

Fast forward to the end of January and deep into this rally and sentiment has changed quite a bit to the bullish side. Earnings have been questionable, but not terrible. The economic data has been less inflationary and the Fed will have to make a decision on how much further they need to go with interest rates, and any kind of pivot to a less hawkish or a dovish outlook could flip a switch to the bullish side for the economy and the stock market.

All that said, it brings us to this week where we see overbought indices after the massive January rally, and that is going to be met with earnings from some of the biggest market moving companies in the market, and of course the FOMC meeting on Wednesday and their likely 0.25% interest rate hike and possible changes to the monetary policy statement.

So, as we head into this week it is very likely that what happens will make or break the stock market. Just looking at the chart we can see the roadblocks or, in some cases, the breakouts, but everything could change come Wednesday afternoon after the Fed Press Conference.

The Nasdaq has come a long, long way in January, but here it is overbought, at the 200-day EMA, and at a rising resistance line. It doesn't have to crater, but the chances of it flying right through resistance without a pause seem unlikely, although with the Apple and Amazon earnings coming up this week, along with the Fed who could say something dovish, it's not out of the question. There is an overhead open gap that could try to lure it up if the bears can't keep it below resistance.




The S&P 500 is also near its recent highs and at the top of an old gap (blue) that had been filled already. It's a good looking formation but a pullback to form a more consolidated right shoulder of what looks like an inverted head and shoulders pattern is possible and probably would be more stable.




The DWCPF (S-fund) did break out last week - above its 200-day EMA and above the neckline of its inverted head and shoulders pattern. Again, not having much of a right shoulder does make it look a little vulnerable. The rising trading channel looks impressive and that is tough to argue with.




Yields are telling, and I mentioned keeping an eye on the 2-year Treasury Yield. Currently 4.13%, if it falls below 4.0% it will get the Fed's attention, if it hasn't already, and potentially get them to stop hiking rates.

The 10-year yield looks like it wants to go lower as it fills in the right should of it head and shoulders pattern, so stocks, which their inverted head and shoulders patterns, are still moving counter to yields. This chart could try to test the 50-day EMA or even make a head test near 3.8%, but this is a bearish formation that suggests yields will eventually come lower. Pricing in a recession would likely be the cause.




Earnings from Amazon and Apple come out after the bell on February 2nd, and [correction] the Fed decision on interest rates is on the 1st. What do you think will happen because now would be the time to adjust your allocations for any fireworks afterward.

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The S&P 500 (C-fund) is nearing the resistance of the December highs and it is also at the apex of a rising wedge pattern. The MACD Histogram is giving it a negative divergence, but it is possible that all of these negatives could be thrown on their head if the Fed signals a pivot away from higher interest rates later in the week. That's what the bulls seem to be counting on.




The EFA / I-fund was down slightly on Friday and it has been lagging in recent days as the US stocks tried to play catch up. The chart looks good and a consolidation or pullback wouldn't be the worst thing that could happen here. The MACD Histogram is also signaling a negative divergence on this chart so a pullback wouldn't be a surprise.




BND (bonds / F-fund) has been moving sideways creating a bullish looking flag while the yield on the 10-year Treasury is forming that right shoulder, as I showed above. That head and shoulders pattern on the 10-year look bearish for yields but that makes it potentially bullish for bonds and the F-fund.




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

Tom Crowley




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