New Allocation: 20% C Fund, 20% S Fund, 20% I Fund, 40% G Fund

A TON of analysis has gone into this reallocation decision.  I’m keeping this Alert as short as possible while including all critical info for this decision, and what may come next…  First the rationale, then the charts.

Rationale

  1. Both the S and I funds have collapsed down to their respective 50% Fibonacci retracement levels between the 2009 low and the 2020 highs (See the S fund chart below).  By reallocating to predominantly G fund on 21 February, I have endured none of the losses during this 50% retracement.  Any reallocation to the S and I funds at this level will almost double when the price gets back to the February high.  The price may go lower from here in the short term but, I am locking in close to a 100% potential gain.  Since the 50% retracement level is the most common reversal area, this reallocation makes sense from a long term perspective.
  2. In the 5 month daily charts below you will see that the S and I funds have been consolidating for the past several days and are breaking out today.  This breakout MAY NOT hold!  If it does not, and prices roll over to close below the support lines, I COULD go back to G fund at that point.  This defines my short term risk.  No support line exists on a daily chart of the C fund so, the S and I support levels would be my line in the sand IF I decided to reallocate back to the G fund.
  3. I am NOT trying to time the bottom of this market collapse!  By reallocating 25% to the C fund 2 weeks ago, I started to buy back into the stock funds at defined support levels and discounted prices.  This reallocation increases my exposure to the stock funds to 60%.  IF/WHEN the stock funds confirm a bottom and close above their respective 10DMA lines, I will look to add more into the stock funds

Very Long Term

In the 12 year weekly chart of the S fund below you can see that the price has crashed down to the 50% retracement level.  This means a 50% loss of the gains made from the low in 2009 to the high in February 2020.  There is a lot of support in this general area including the late 2014 low and the early 2016 low.  While there are no guarantees, this price area SHOULD represent at least a short term bottom.  Additionally, the technical indicators are EXTREMELY over-sold.  All of these factors, taken together, suggest A bottom at this level.  Will it be THE bottom???  I doubt it but, that will depend on the kind of recovery rally we get over the next few weeks.  

Short Term

Based on the long term chart above, I have come to a tentative conclusion that a short term bottom is in place, at or near this level.  The next step is to validate that bottom and extrapolate the relief rally going forward.  

In the 5 month daily chart of the C fund below, we want to see 3 things over the next week.  First, the C fund should NOT close below 2200.  Second, the price needs to close above the 10DMA line consistently.  Finally, we want to see a follow-thru day; a big price move up on very big volume.  This would indicate large financial institutions are buying at this level.  IF these 3 things play out, then we would look for the relief rally to hit one of the retracement levels between the Feb high and the current low.   

The S fund chart below shows a stronger bottom argument than the C fund.  The S fund has several days of consolidation at the 900 level and is breaking out today.  Over the next week, we want to see the same 3 things.  900 needs to hold as the bottom, the price needs to get above its 10DMA line, and we want to see a follow-thru day.

 

The I fund chart is currently the strongest because the price (as I’m writing this) is above the 10DMA.  Otherwise, we’re looking for the same 3 things over the next week for the I fund.  The 46 low should hold, the prices stays above the 10DMA and a follow-thru day.  If we get all three, we should expect a recovery rally to up to a minimum of 55.  

Bottom Line:  From a very long term perspective, our risk/reward ratio is excellent at the 50% retracement level from the 2009 lows.  Even if we absorb continued price decline, in the short term, we’re in a great position to maximize gains going forward.  If/When a bottom is confirmed, I will add to my % in the stock funds.  From a short term perspective, the risk is defined.  If the bottom does hold at this level, we have initial Fibonacci retracement levels as a guide for the recovery rally.

Lots more to follow if/as the recovery rally unfolds.  This is NOT an exact science so, stay flexible and draw lines in the sand based on YOUR risk tolerance.  

Please post questions to comments or email…

Jerry