New Allocation: 25%C Fund, 25%S Fund, 25%I Fund, 25% F Fund
This ALERT is based on several factors that I will lay out in the charts below. The spark that finally got me to reallocate into the stock funds was the FED Chairman’s remarks on Wednesday afternoon. The result of which caused interest rates to drop significantly.
1. As I discussed in the Sunday Update a couple of weeks ago, to be on the right side of the long term trend, you need to be in the stock funds when the weekly closing price is above the 40WMA. The C fund closed above this level last week and I was looking for a good day this week to reallocate.
2. The key points of FED Chairman Powell’s speech on Wednesday afternoon included no new rate hikes for the foreseeable future, stop liquidating Treasury holdings in September, and use its Mortgage Backed Securities portfolio proceeds to buy more treasury securities. This is a way of allowing more money into the system without increasing the FED’s balance sheet. It’s a new form of quantitative easing. When the FED eases monetary policy, interest rates come down as can be seen in the 10 year treasury chart below. This means that stocks become more attractive as an investment than bonds.
The F fund saw a significant spike on the FED announcement which is why I decided to allocate 25% to the F fund. With treasury yields beginning another leg down, the F fund should continue higher from here.
3. The S&P500 (C fund) jumped higher on the news, closing up over 1% on Thursday with tech stocks leading the way.
Bottom Line: The FED is trying to keep the rally going. The FED usually gets what it wants…
So if all this is true, why did the market tank today (Friday)? What is known as “an inversion of the yield curve” is one important indicator of a slowing economy and possible upcoming recession. We’ve been hearing about a slowing global economy for over a year as the yield curve has flattened but stocks continued to rise in the face of it. The yield curve inverting on Friday is significant but does not imply that a recession is imminent. For more on this, checkout this CNBC article.
I will be watching the C fund chart above very closely. If prices stay above the Support / Resistance line and the 50DMA crosses the 200DMA on the upside, we are in good shape. If prices fall below the 200DMA, I will be looking at getting back into the G fund.
Please post questions to comments or email. Have a great weekend!