TSP Talk Blog

The Dow closed lower on Friday as 7 of the 8 heaviest weighted components in the Dow were down, but the smaller, broader market indices, as well as big tech, did do quite well. The Nasdaq and small caps outperformed with gains over 1% on Friday, and it was good to see big tech and the smaller companies on the same page for a change. Bonds were down as yields ticked up again, and the I-fund lagged US stocks, posting just a modest gain of 0.18%.

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There's no doubt that watching the S&P 500 and the Nasdaq continuously hit new highs in a near parabolic fashion is cringe worthy. The rubber band will snap at some point, but momentum is a strong force and we never know when the inevitable pullback will begin. But as I have been talking about, the other TSP funds, the S and I funds, have been doing a fair amount of consolidation recently and the charts have been basing forming some decent looking formations with more support underneath them than the S&P 500 chart.

The question is, when the parabolic S&P and Nasdaq do finally pull back, can the S and I-funds continue to build on their bullish looking set ups, or will they move down in sympathy with their larger siblings?

The inflationary picture has improved and economic growth has been better than expected, and that sounds great, but it also creates a less dovish Fed who are suggesting that rate cuts are not needed at this time. Since the market had been rallying on the prospects of several rate cuts this year, that leaves us with the possibility of stocks re-pricing in the more hawkish Fed. On the other hand the positive development in the economy makes for a better environment for small caps if they can survive the "higher for longer" interest rate sentiment.

The 10-year Treasury Yield has reached up to the January high again and we have a little inverted head and shoulders pattern in between. These tend to break to the upside, which is not generally what the market wants to hear, but small caps did well last week despite the higher yields.



The Fed's balance sheet ticked up slightly last week - just over a billion. Over the last year that has led to good things for the stock market in the week or two after the move up, but the increase was so small that it may be inconsequential. However, it wasn't lowered and that may put some pressure on the dollar this week, if no other economic data has an impact, and this is actually a busy week for economic data, which I'll post below.

The dollar does have an impact on stocks but it isn't always a direct correlation. It's just that right now the market is sensitive to stronger economic data that may or may not add inflationary pressure, and the dollar reacts to that - the same way the bond market reacts to the data. And the trend in this recent inflationary times has been for stocks to move counter to the direction of yields and the dollar.

As I mentioned, last week we saw small caps uncharacteristically perk up despite a move higher in yields and the dollar. But the dollar peaked on Monday and pulled back a bit the rest of the week while the 10-year yield closed at its highest reading of the year. That was a sign of relative strength for the small caps and the bulls would like to see some follow through on that this week, and perhaps that tick up in the balance sheet will help.

OK, that sounds like a lot of mumbo jumbo, but the market is always seeking a catalyst and whether its the interest rates and yields, the dollar, the price of oil, the credit market, overseas markets, whatever. Knowing what the key catalyst is at the moment could help with timing the swings in the indices.

The Dow Transportation Index helped confirm last week's rally in stocks as it made a new closing high for the year on both Thursday and Friday. The beautiful cup and handle formation that was formed is a classic breakout pattern and the old resistance, once broken, tends to act as support so we'll see if that 16,200 area can now hold this chart up.




This week we will get the Consumer Prices report, aka the CPI, on Tuesday and the PPI on Friday. Retail sales come in on Thursday morning.

This week is also the last week of a positive seasonal bias for stocks in February. Starting next week the seasonal bias turns more bearish.

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The S&P 500 (C-fund) rallied on Friday, adding onto its new highs and flying firmly above, and closing above, 5000 for the first time. It's overly stretched but momentum can be a tough force to stop. It's likely getting close to some kind of a pullback, but the longer it keeps making new highs, the more the FOMO bears may be forced to get on the bullish bandwagon, and it could really go parabolic. But that would likely be the beginning of the end of the rally.




DWCPF (S-fund) looks very good but we do have a potential double top pullback possibility. We have what looks like a bullish cup and handle formation and they tend to breakout to the upside, however it would have looked better if that middle high between the cup and the handle made it up to the December high level (blue arrow.)




The EFA (I-fund) has formed a very good looking inverted head and shoulders pattern with the 75.50 area being the neckline and potential breakout area. It will probably need the dollar to soften this week to see it breakout.




BND (bonds / F-fund) remains in that long bullish flag pattern, but the recent rally in yields has kept it from breaking out to the upside. The 50-day EMA is being tested now as support.




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

Tom Crowley


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