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TSP Talk - CPI was warm, but maybe not as bad as expected

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The CPI report came in a little hotter than expected but perhaps not quite as much as feared, and stocks did some flip flopping during the day. The Dow reversed almost 200-points from high to the close yesterday and lost 70-points, and small caps did not do well at all. Meanwhile the S&P 500 and Nasdaq were again kept afloat by big tech stocks doing well, and closed with modest gains. Bond yields spiked then retreated, creating a potential negative reversal pattern.

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The CPI was up 0.6% in August or 3.7% year over year. The Core CPI, which excludes the more volatile energy and food prices, was up 0.3% last month and 4.3% YOY. The PPI, Producer price index, comes out this morning.

The 0.3% gain in the Core CPI was slightly higher than the 0.2% that was expected but the market took it in stride despite the change in direction after two prior months the were near 0.2%.

The recent rise in oil prices could keep the pressure on the CPI, but the Core may not get impacted as much - so says Morgan Stanley research.

But the price of oil will impact all of us when gas, travel in general, and shipping costs go up. Oil was down slightly yesterday after making a new high earlier in the day.

The longer term chart of oil shows it breaking out of a 10 month trading range between about $65 and $85. That's bad enough, but looking further back we can see how much further it can go -- unless there's recession. Is it going there? No one knows for sure, but the stock market will be reacting to these moves as we get past the other inflationary data reports.

The Yield on the 10-Year Treasury spiked higher initially after the CPI data was released but it settled down and actually closed down on the day, and may have created a negative reversal pattern that may mean a peak is in sight. That's good news for interest rate sensitive companies, but it's too soon to say if falling yields will be good for stocks past the short-term. Yields will come down if the economy slows down, and that would negate any positives from a lower yield.

Once again the S&P 500, which weight big tech companies heavily, outperformed the equal weighted S&P 500, and it did so by quite a bit. With small caps down sharply yesterday we're back in market that is relying heavily on those big tech companies. Perhaps the large cap indices can grind out some gains, but it seems like eventually broader weakness might catch up to the entire stock market.

Reminder this is a quadruple witching expiration week. It has a decent bullish bias historically but it can also be quite volatile. Next week - post quad expiration week in September, has a poor record historically. There is an FOMC meeting next week but no interest rate changes are expected yet.

The S&P 500 (C-fund) is holding up well considering the chart looking very vulnerable - even though it is holding up much better than the S and I fund charts. That blue box is holding a potential bear flag but it is above the 20, 50, and 200-day EMAs as of yesterday's close, and there's a clear open gap up by 4565, so while I am concerned, I won't count the bulls out just yet.

DWCPF (S-fund) is another story. It's an ugly looking head and shoulders pattern but again, H&S pattern don't always break down when they are coming off a rising market, which this is. 1760 looks important in the short term but it's 1720 that would be the line in the sand.

EFA (I-fund) was down again, but only enough to fill in a small gap so maybe that was all it was doing down there yesterday. Still, another ugly chart that may favor the bears, but as long as it stays above the 200-day EMA, the bulls are still in the game.

BND (Bonds / F-fund) rallied with the decline in yields and it seems to be desperately trying to hold above that old resistance line that has turned into support, although that open gap below that is always a possible downside target.

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

Tom Crowley

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