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TSP Talk - Bulls keep chipping away at the fall losses

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More green on Friday for stocks and the new multi-month lows in the 10-year Treasury Yield and the dollar, are helping. The inflation data has been coming in on the cool side, yet the economy has been resilient so far, setting up a goldilocks situation for the stock market. Small caps love the lower yields and the prospects of the Fed ending their rate hiking policy. The weakness in the dollar has been helping the I-fund keep pace with US stocks recently. The C-fund has been leading most of the year because of those Magnificent 7 tech stocks that weigh so heavily on the large cap indices.

Daily TSP Funds Return
The big three indices were a little better than flat but more broadly the small caps, the Transports, and even the financials have finally joined the party. However, as we'll see, the charts still have some potential roadblocks. For now, the bulls keep slowly adding to the big November gains, trying to recover the losses from the August through October correction.

The Yield on the 10-Year Treasury closed off its lows on Friday but it was a new closing low going back to mid-September where a gap opened, and now the chart is backing and filling that gap. There's also a large open gap up by 4.8% and the stocks market might act a little differently if that gap gets any attention in the coming weeks.

The dollar also made its lowest close since early September. This helps prices move higher, especially the I-fund, in our case.

Interest rates may not be going higher anytime soon, but the Fed may not be cutting rates unless or until the economy really shows some weakness, because the last thing they want to see is inflation come back, which is a good possibility if they get too complacent with rates.

So stable interest rates is a good thing, as long as the stock market knows that the Fed won't blindside them with another hike, but what does continue is that they are steadily reducing their balance sheet, and that is the opposite of Quantitative Easing, something that assisted the stock market for years before inflation raised its ugly head. Now the Quantitative Tightening could eventually become a concern.

They reduced their balance sheet by another $46 billion last week, and its now down about a trillion dollars since the March peak. This is something that we shouldn't forget about and goes unnoticed investors when stocks rally like they have in recent weeks, but if it continues, it will likely be a headwind for the stock market.

You might recall the regional bank issue we had back in March and you can see in the chart above that the Fed helped by spiking their balance sheet higher to help out these banks, but since then it has come down substantially as the regional banks stabilized. However, here the KRE regional bank index is again trying to get back above its 200-day moving average. This recent rally is what has helped the S-fund do so well recently, so whether it fails here at the 200-day average or not, could make or break the S-fund, and maybe the November rally in generally.

Seasonality is on the bulls' side for the rest of the year so a breakout is a good possibility, but we have had some December clunkers in stocks. December 2018 turned out to be a disaster for stocks.

This chart shows the open gaps (red) on the S&P 500 and the filled gaps (green). There's no guarantee that they all get filled, but more than likely at some point those red gaps will draw attention, get filled, and turn green. The one up by 4570 is drawing attention now, but we can't forget about the three below -- or make it four if we still believe the gap near 3975 is a possible target. Click image to enlarge

It's a very quiet week for economic data, although we do get the FOMC meeting minutes on Tuesday afternoon.

The S&P 500 (C-fund) has been remaining buoyant despite the overbought conditions and the open gaps below that would normally draw it down before advancing any further. As I mentioned above, there is also an open gap by 4570, although you can't see it on this chart. Too far, too fast, or will the bullish seasonality trump the typical response to open gaps?

DWCPF (S-fund) had that nasty negative reversal day last Wednesday, and that was followed by some selling on Thursday, but the 200-day EMA held on that pullback, and the S-fund bounced back on Friday. Breakout, or fake out? Again... open gaps below give the bears a reason to put pressure on, but the 200-day EMA is there to try to hold it up.

EFA (I-fund) blasted through some resistance on Friday and the weakness in the dollar has helped this fund to keep pace with the hot S-fund. But... you know what I'm going to say about the gaps.

BND (bonds / F-fund) has had a big run and the fund is up 3.4% this month. The 200-day EMA is being tested here so the question is whether yields are ready for a relief rally after the sharp pullback recently.

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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Yahoo Finance Realtime TSP Fund Tracking Index Quotes