TSP Talk Blog

Stocks popped higher on the softer than expected Producer Pricing Index report, and the relief rally off the lows regained some steam yesterday. We're back to seeing gains well into the 1% and 2% area, which means volatility is still lingering, but recently it has been bullish action. Today we'll get the CPI report, and it could confirm yesterday's PPI data, or turn it on its head. Yes, lower inflation is a good thing, as long as it isn't a result of slowing economic activity.

Daily TSP Funds Return More returns

Much of the decline in stocks in the first week in August had to do with that Yen carry trade, but that has basically wound down, and now perhaps it's time to focus on the economy and valuations again. The PPI helped and last week's weekly jobless claims were positive catalysts helping the oversold indices to get some needed relief.

You can't keep the Magnificent 7 down. Despite concerns over lowered foreword earnings forecasts that caused the Mag 7 stocks to plunge for a few weeks, they have taken the lead again on the upside during this impressive dead cat bounce off the recent lows. But now that the S&P 500 has regained the Yen carry trade triggered losses, do we have the fundamentals to get back the losses that Mag 7 gave up a few weeks ago? Nothing has really changed except maybe some bargain hunting prices.

The S&P 500 (C-fund) is a big benefactor of the Mag 7 rally, but here it is having gained back just over 50% of the losses it had incurred sine the July peak, as we head into two more important economic data reports, the CPI today, and the jobless claims on Thursday. A "V" bottom continued rally would certainly be impressive, but we may need to see the data come in perfectly.




Remember the summer of 2023 version of this?




The 10-year Treasury Yield was down on the lower PPI data, and that sent bonds and the F-fund higher yesterday by 0.38% (bond prices move counter to bond yields), so bonds are actually rallying on the weakening economic data, yet stocks are rallying on the same data. Interesting times.




Here is the 2-year / 10-year Treasury Yield Curve. Normally longer term bonds pay a higher yield than shorter term, but that hasn't been the case for the last two years with the 2's and 10's, and that's called an inverted yield curve. It happens, and now the two yields are getting close enough to almost flatten the yield curve and perhaps finally start seeing it steepen again above 0.00. The trouble is, history suggests that is potential trouble for stocks.




Yes, lower rates do tend to help the stock market, but this old chart that I have posted before (so it is not up to date), shows what happened to the S&P 500 after the yield curve went from inverted to "un-inverted" in the last 25 years.




The reason that happens is because when the Fed starts lowering rates with any enthusiasm, it is usually a result of an economy that is losing steam quickly.

Can the stock market rally again on more good inflation data, or is it set up for a sell the news reaction - good or bad? Investor sentiment has done an almost 180 degree turn in the last week. Too much, too fast.

---

The DWCPF (S-fund) came along for the ride and the chart is knocking on the door of the open overhead gap, the old rising support line, and the purple 36-day EMA, which seems to have some significance on this chart.




The EFA (I-fund) also had a big day as the dollar continued its slide lower as the economic and inflation data continue to show some weakness. One gap was filled (blue) after it easily busted above some tough looking resistance. There's another open red gap above, but the dollar needs to keep helping.




BND (F-fund) was discussed above. It was up 0.38% yesterday.

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

Tom Crowley


Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

Questions, comments, or issues with today's commentary? We can discuss it in the Forum.

Daily Market Commentary Archives

For more info our other premium services, please go here... www.tsptalk.com/premiums.html

To get weekly or daily notifications when we post new commentary, sign up HERE.



Posted daily at www.tsptalk.com/comments.php

The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.