Friday capped a shutout by the bulls last week as the S&P 500 and Nasdaq were up everyday of the week.  Those gains nearly recovered all of the disastrous losses in the first week of September.  The small caps (S-fund) and the I-fund still have some work to do to recover those losses, and bonds (F-fund) are having a big month with a 1.8% gain.  It's a big week for the market as the Fed is almost certainly cutting interest rates on Wednesday.

Daily TSP Funds Return More returns

The  last time I posted this chart was on Thursday before the PPI and initial jobless claims data were released.  That day there was a 15% chance of a 0.50% interest rate cut from the Fed.  Since then the probability has moved up to 50/50 whether we see 0.25% or 0.50%.

         
 

The 10-Year Treasury Yield was down again on Friday and at this point I think the bond market may start to tell us whether or not we're going to get a recession.  The 10-year is low enough after falling for a year, and if it keeps going down, it's probably telling us more than just that the Fed is going to cut rates.  We know that and it's priced in.  

       

The Fed has a tendency to follow the 2-Year Treasury Yield and with it plummeting down to 3.6% this month, and the Fed Funds Rate still over 5.25%, this too should probably stop going down unless a potential recession is in the cards.

The small caps may love the lower rates but they also get hit hard during recessions so it's nice to see the Russell 2000 and the S-fund spike higher on Friday, but if a recession is looming, it may be tough to see gains hold.  I don't know which it will be but there is good evidence for and against an impending recession.

       

The market leader Dow Transportation Index had an interesting day on Friday.  It gapped up with most stocks early on, and it was breaking out above that consolidation surrounding a group of moving averages acting as support, but unlike the other indices, the Transports gave back a lot of the early gains, which is not overly encouraging.

September seasonality has been talked about ad nauseum and it's not always the same as elections years tend to be weaker than the average September.  Taking a look at the chart, there is pretty decent evidence that the S&P is following it rather well so far, with a lot of red the first week, and green the second week.  The chart now suggests some volatility with a lot of negative numbers starting on the 19th, which would be the day after the Fed rate cut.

       
                     Chart provided courtesy of www.sentimentrader.com


Of course a rate cut would override seasonality, which is not typically a primary indicator, but September's record has been quite clear over the years so we'd be ignoring it at our own risk.

 

The S&P 500 (SPY / C-fund) looks fantastic as it filled in the right shoulder of the inverted head and shoulders pattern.  There is potential for a pullback at the double / triple top, but inverted H&S patterns do tend to eventually break to the upside.  The S&P has been up for 5 straight days and other recent long positive streaks have actually come prior to some big pullbacks, so if stocks rally into Wednesday's Fed meeting, that would make 7 straight days. 

        


The DWCPF (S-fund) led stocks in a big way as the odds of a 0.50% rate cut become higher.  There is some resistance near Friday's close, but it's nothing serious.  Again it's the inverted head and shoulder that sticks out to me most, and they are bullish.  But what if the Fed only goes 0.25% ?

      


The EFA (I-fund) trailed on Friday but still picked up a gain and the chart is also looking favorable.  The size of the rate cut will certainly impact the dollar, and we know how much the I-fund's direction depends on the dollar... a strong dollar weighs on the I-fund and a weak dollar assists it.

         


BND (F-fund) made a new closing high, and even though there are fundamental signs that yields could be bottoming, although they haven't yet.  Bonds and the F-fund move counter to yields.

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

Tom Crowley


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