The Dow lost nearly 300-points yesterday but the broader large cap indices held up well with the S&P's loss giving less than Tuesday's gain, and the Nasdaq actually ticking up.  It was the small caps and the I-fund that had a problem yesterday, with the S-fund lagging and losing nearly 1% on the day.  Bonds were down as yields moved higher.

Daily TSP Funds Return More returns

The stock market would seem to have a green light by almost any fundamental analysis with the Fed making money cheaper, and easier, to get over the next year or more.  As long as the reason for the cheaper money isn't because the economy needs the stimulus, but rather because they are pulling back the rate hikes they made because of higher inflation, which is seemingly all but gone now.  We do get the important inflation data in the PCE Prices Report on Friday, and that could change things, but for now the path of least resistance for stocks may be higher.

The one thing that could get in the way between now and election day, is the seasonality problem and the tendency for stocks to get volatile during the two months leading up to the election.  We know the long-term seasonal averages confirm his this, but most recently we saw that volatility before the 2020 election, the 2016 election, and the 2012 election, and that's as far as I went back. 

          


September has so far survived the rocky start it had as the indices are mostly green with only a few days of trading to go, but October has some historical issues.  Not all Octobers were down in election years but the ups and downs are quite dramatic, which could be troublesome, unless you look at the glass as half full and believe this sets up some potential trading opportunities between now and Election Day.

      


Investors also believe small caps are ready to take center stage with lower rates coming, but let's not forget that the talk of interest rate cuts started way back in November of 2023 when the CPI data started to improve, and since then the Russell 2000 small caps index has rallied about 40% before one cut was made.  Is this setting up a short-term sell the news reaction after almost a year of buying the rumor?

        

We did get a big rally in small caps after the Fed meeting last week but since then we've seen a flat top created and yesterday's pullback from that flat top could be concerning.  I didn't mark it on this chart, but in the TSP fund section below you will see that there is an open gap or two below that could still be looking to get filled.

Holding onto stocks into the end of the year while the Fed is cutting rates may work out just fine for the buy and holder, but don't expect it to be a straight line higher.  There will be plenty of volatility, and that means opportunities to buy low and sell high, if that floats your boat.
 

The S&P 500 (C-fund) is climbing in an F-flag like pattern, which is bullish, until it's not.  The  difference between a bull flag and an F-flag is that bull flags tend to eventually break to the upside, while F-flags tend to eventually break down.  When that break down comes is questionable because F-flags can drag out for quite a while.  But the longer they stretch, the harder they tend to fall.  The 5650 would be the key support that would need to hold on any breakdown.

        


The DWCPF (S-fund) put in a drop off a flat top yesterday, which may be of some concern although the bottom of the first open gap near 2125 could be the target and that would be a healthy, acceptable decline for most bulls, but if we start talking about the next open gap below near 2075, then the action could get more questionable.

       


The EFA was down 0.54% yesterday and the new "ex USA ex China ex Hong Kong Index" was down 0.03%, so I would expect an I-fund return for Wednesday to be somewhere between the two.

A little follow up to Tuesday's action where we said, "The EFA was up 0.59% yesterday and the new "ex USA ex China ex Hong Kong Index" was up 0.69%, so I would expect an I-fund return for Tuesday to be somewhere between the two, although there may be some fair value added after Monday's price."  --  The I-fund was eventually given a return of +0.65% for Tuesday so it was right in the middle of the two. 

We're still in limbo on the I-fund's transformation to the new components so guessing at the return before the TSP posts the price is a little tough a the moment.  You will see the final price and return posted on our site by Monday evening.  Here's more information from tsp.gov.


BND (F-fund) pulled back sharply but once again the 20-day EMA is trying to hold as support.  The stock market might get concerned if this breaks down because it will mean bond yields are moving higher - not something investors really want to see right now.

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

Tom Crowley


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