* ALERT *: 25 December 2018

New Allocation: 50% C Fund, 50% G Fund

I’m going to do something here that is counter to my normal investing philosophy but, in light of current market conditions, I’m convinced the risk is in my favor.  Since the high in mid-September, the S&P500 (C fund) is down just under 20%.  That’s a big move in 3 months but, the vast majority of that loss came in the past 3 weeks.  Since the beginning of December, the market has been down BIG almost every day!  This is unsustainable.  I do not believe we are at the ultimate bottom of the correction but we are way over due for a short term rebound.  At this point, I believe we are at a price level where support is so strong that a recovery rally is highly likely.  I’m going to put up one very busy chart below to explain.  If I’m right, a rally back up to 2600 is a 10% move.  If I’m wrong, the downside is approximately 2%.  Because the short term trend is clearly down, I’m only allocating 50% to the C fund.  At 50% exposure, my risk is cut in half but so is my potential gain.  Feel free to adjust these allocation amounts to fit your personal risk tollerance.

The chart below is the S&P500 (C fund) 11.5 year, weekly.  The blue curved line is the 200WMA and the red line connecting the bottoms is the 10 year trend line.  These 2 lines have intersected and the price has fallen to that exact level.  This is a MAJOR support point.  The volume (shown just above the yearly axis) shows the amount of shares traded.  As prices have dropped, volume has increased to levels not seen since the low in January 2018.  The MACD and RSI indicators are at EXTREME over-sold levels on a weekly basis.  If we are not at a short term bottom, we are VERY close to it!  

Ideally we want to see a bottom pattern form and the indicators turn up before getting back into the stock funds.  In this case, with such a drastic fall in prices down to long term support levels, we are likely to get a short term V bottom rather than a tradable bottom pattern.  My goal here is to grab some of the gains from this V bottom and then move back to the safety of the G fund when the market rolls over.  

There are only 3 things I’m looking at over the next several days/weeks:

1. If the market rallies back to 2600 intra-day, I will likely move back to 100% G fund.
2. If the market rallies but does not hit 2600, I will move back to 100% G fund on the first major down day or resistance (this will be another ALERT if necessary).
3. If the market CLOSES below 2290, I will move back to 100% G fund.  (This will be a 2.5% move lower from here but only a 1.25% risk of loss since I will be only 50% invested in the C fund)

This is all based on the price level today (2351).  These numbers will change a bit based on tomorrow’s closing price.  

Again, I do not believe that we have seen the ultimate low of this correction.  The ultimate low SHOULD fall between the 38% and 62% retracement levels, or 1536 to 2068.  This is a short term attempt to increase my TSP account value during an overall severe market decline.  The ONLY reason this is possible now is we are at the end of the month and still have 2 moves remaining in TSP.  I would NOT be doing this move if we were in the first week of January.

In summary, long term support is in place, making market risk to enter the stock funds low and quantifiable.  The price chart is very over-sold and technical indicators are at extreme over-sold levels.  I am only moving 50% into the C fund to further minimize downside risk.  Most importantly, upside potential is significant.  

This trade may not be for everyone.  There is certainly risk involved and this is NOT a recommendation.  I am sharing my personal short term reallocation strategy.  You are free to follow, disregard, or make adjustments based on your personal risk tolerance.

Please post questions to comments or reply to the ALERT email.  Have a great week!

Jerry