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TSP Talk - Looming gov't shutdown spoils early Friday rally

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After a positive reaction to the PCE Prices report at Friday's opening bell, stocks drifted lower for most of the day as the threat of a government shutdown got more real as the day wore on. Stocks were mixed but mostly lower as far as the TSP funds were concerned. Only the Nasdaq managed a small gain. Fast forward to Sunday evening and the futures were up, erasing much of Friday's losses after a temporary agreement was made to fund the government for another 45 days.

Daily TSP Funds Return
The action has not been all that great and perhaps there are some positives heading into Monday. Not only was the inflation data better than expected and the shutdown averted for a while, but Mondays have been up for 12 straight times going back to July 3.

Whether that will help change the direction of the two month long bearish activity we have experienced as we enter a new month, remains to be seen, but so far the 7 - 8% pullback in the S&P 500 is really garden variety action, and typically occurs about one or twice each year. We had one in March, and in a week or so the seasonal weakness turns much more bullish as the 4th quarter starts churning.

The 10-year Treasury Yield is one of the three catalysts that has been weighing on the market, and Friday we saw a deep dip in the yield after the release of the PCE Prices report. And while the yield did end down for the day, it did close well off the lows and at the intraday highs so the momentum on Monday may be on the side of higher yields. That is unless the continuing resolution agreement can change that.

The dollar is another catalyst and it saw very similar action except on Friday, and in this case it closed far enough off the lows to be positive on the day, so this continues to weigh on the stocks market.

I believe the strength in the dollar is currently a reaction to the quantitative tightening of the Fed balance sheet which was down another $22 billion last week. That's more than $700 billion off the March high and it is having its effect.

And of course the rising price of oil has been the third catalyst weighing on stocks and the two-day sell off was helping stocks early on Friday before the market closed without a resolution to the potential government shutdown. Oil futures were up modestly on Sunday evening.

We are seeing some potential signs of life in a couple of charts, albeit on thin ice. The Dow Transpiration Index is trying to stay above the 200-day EMA, which is usually an important support area for a pullback or correction. It is where algorithms and money mangers are usually looking to do some bargain hunting. The Transports are hanging on and trying to break above the recent downtrends.

The Nasdaq has been relatively stronger than some of the other indices as it never did come down to test its 200-day EMA, and it held at some other trend lines when it needed support. The 50-day EMA was broken and it would need to battle back to recapture it to get the bulls more interested, but it has been technically more sound.

There's a good chance that the bulls will try to make a play today, but the bears may not give up so easily since they still have the momentum. The indices are fairly oversold and investor sentiment has been very fearful, so there is some ammunition for a relief rally.

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The S&P 500 (C-fund) still has that large head and shoulders pattern that it is dealing with and a breakdown target would be much lower than last week's low, but it held at the 200-day EMA last week after partially filling an open gap from June, and that's a pretty good development. There is a big open gap up by 4400 and that may be the lure keeping it from falling any further, but there is some resistance in the way at the breakdown level, or blue neckline of the head and shoulder pattern, right near Friday's high.

DWCPF (S-fund) was actually up last week but on Friday it ran into the 200-day EMA, which it has been trading below for over a week. Getting back above it would be big for the bulls, but that's a lot of resistance near 1740 to deal with.

The EFA (I-fund) was the lagging fund last week, and while it was down for the week, it turned out to outperform the C and S-funds in September, despite the relentless strength in the dollar which normally causes it to lag the US funds. If the dollar can relent somewhat, the I-fund could benefit most. That's a big IF at this point.

BND (bonds / F-fund) is still looking for life as bonds linger near the recent lows and BND sits on top of a support line with nothing but air below. A relief rally may be due, but we've been saying that a lot lately.

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

Tom Crowley

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S&P500 (C Fund) (delayed)

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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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