* Alert Analysis * : 21 February 2023
In this weekend’s TSP Weekly Newsletter, we posted our “Lines in the Sand” for both the C and S funds. The C fund was a daily close below 4060 and the S fund below 1740. Because the market gapped down at the open and continued lower throughout the morning, we are comfortable that today’s closing price will be below these levels and posted a change to the Grow Model Portfolio this morning.
As TSP investors, our goal is to be on the right side of the trend. Given the 2 move per month rule and the noon rule, the weekly trend is most important but we have to make reallocation decisions on a day. Today’s price breakdown through short term support levels is what generated this reallocation Alert.
We are living through a very challenging market and this is not going to change any time soon. There are analysts calling for extreme price moves in both directions and/or years of range bound price action. There are a wide variety of inputs effecting this market, two of the most important are the 10 year yield (TNX) and the price of the U.S. Dollar (DXY).
The daily chart below shows the S&P500 (C Fund) in black and the TNX in yellow. We can see that when the TNX trends up, the C fund trends down. When the TNX trends down, the C fund trends up. The February high on the C fund corresponds to a triple bottom for the TNX. The breakout of the TNX off this triple bottom is a serious headwind for stocks, resulting in the breakdown we are seeing on the C fund over the past few weeks. As the yield on the 10 year bond continues higher, the stock funds will continue to be under pressure as well as the F fund.
The daily chart below shows the S&P500 (C Fund) in black and the U.S. Dollar (DXY) in yellow. Much like the TNX, when the DXY is in an up trend, the C fund is in a down trend. When the DXY is in a down trend, the C fund is in an up trend. We’ve talked about the Dollar, and its relation to the price of the I fund, numerous times over the past 2 months. The I fund responds more to the price of the DXY more than the C and S funds but, when the dollar is rising, all of the stock funds come under pressure. The rise of the dollar is a significant contribution to the decline in the stock funds over the past couple of weeks.
We’ve shown this chart several times over the past few months, generally with respect to the I fund. The dollar’s decline to its 50% retracement level is what propelled the I fund since the October low and has also been a strong tailwind for the C and S funds. The dollar found support at the 50% retracement level and has moved steadily higher since early February, putting pressure on all three stock funds.
The last Big Picture chart shows the C fund going back to 2015 with the 200 Day Moving Average (DMA) in red. The 200DMA is an important, ongoing, support and resistance line. Most of the time, price is above this line. When price corrects, most of the time it finds support at the 200DMA line. When price is moving up through this line, it usually signals the beginning of a significant up trend. There are only 2 failures in this chart; one in late 2015 and one in April 2022.
We need to watch closely as price comes down and tests the 200DMA. If we see support and price rallies, the bull market that began at the October low will continue. If we get another failure at the 200DMA, price is likely to move significantly lower.
Big Picture Bottom Line
If yield and the price of the U.S Dollar continue higher, all of the TSP funds will be under pressure. At the same time, the G fund increases in value as yields rise. If yield and the dollar continue to rise, the price of the C fund will collapse right through its 200DMA line.
A sell trigger will be in place at today’s close. The C fund price will be below its 20DMA, RSI below 50, CCI below 0 and MACD negative and declining. There is a tremendous amount of potential support with convergence of the 50DMA, 200DMA, long term down trend line, and short term up trend line. The support zone is 3930-3980. We could see support anywhere in this zone. A daily close below 3930 would be extremely bearish, as price would likely continue lower to test the October lows.
If price rallies off of the support zone, great. We will reallocate back into the stock funds. If the support zone fails, we are protected from significant downside risk.
The macroeconomic indicators have been screaming for lower stock prices. Maybe today was the beginning of a significant correction or collapse. It could also be a pull back to support at or near the 200DMA line, which would be very consistent with historical bull market rallies.
This is a very challenging market. GrowMyTSP will continue to evaluate the data and make adjustments to the Grow Model Portfolio as necessary.
New Allocation: 100% G Fund
The Grow My TSP Team
GrowMyTSP.com does NOT provide personal investment advice. The Alert and Analysis are designed for you to make your own reallocation decisions based on your personal circumstances and risk tolerance. This Alert analysis details the current allocations within the “Grow Model Portfolio”. You can follow along with these allocations or use this information to make your own reallocation decisions.
You’re welcome! I hope it was helpful.