In an interview on Bloomberg following the Q & A, former New York FED President Bill Dudley had the same observation. He expected the market to respond favorably to the FED remarks. The reality is, that's not what happened. The market opened higher yesterday but accelerated down into the close.
The Charts
On a weekly basis (through Wednesday), the C fund is approaching its 20WMA (week moving average). RSI is above 50, CCI above 0, but MACD has crossed negative. We do not yet have a sell trigger, on a weekly basis, for the C fund. It's clear that price needs to find support at the 20WMA if this rally is to continue. Compare the current price action to September 2020. It's very similar.
On a daily basis we do have a sell trigger on the C fund. Following a strong breakout on 29 August, the C fund rallied a bit but could not get moving. Yesterday's price action and technical indicators took a clear turn to the downside.
The horizontal red line is critical. It encompasses the August 2022 high, support in late June and August. A close below this line would be a longer term bearish indicator for the C fund.
On a shorter term basis we have the Head & Shoulders topping pattern continuing to form along with measured moves to identify potential turning points. Price closed yesterday at the short term a-b-c pattern low. This morning's futures market price suggests that price will continue to fall. A break below the neckline at 4350 takes us down to 4270 at a minimum.
The IWM is the Russel 2000 Index. It's not exactly the same as the S fund but is very close. For our purposes, the pattern is easier to see in the IWM and is leading the S fund. In the long term, we have a clear sideways consolidation pattern. In the short term, we have a clear break in a Head & Shoulders topping pattern. The minimum downside following a successful H&S top is the distance from the top of the head to the neckline to the downside. This gives us a projection of 163 or the bottom of the channel.
The I fund has held up much better than expected given the continuous rise in the dollar. Having said that, the obvious rounding top pattern in the I fund is not a good look. Importantly, the I fund is struggling at 50RSI and MACD is basically flat.
Yield spiked yesterday sending the price of the F fund down. Like the I fund, the rounded top of the F fund is not a good look. RSI cannot get above 50 and MACD is flat. We have not seen the lows on the F fund yet.
The price action of the dollar throughout 2023 has been extremely frustrating and has cost us the most in terms of TSP performance. When the dollar is in a decline, stocks move higher. When the dollar is advancing, stocks move lower. The failed bearish consolidation pattern in the dollar cost us. The breakdown through the lower channel line is July was a great time to go long stocks. Unfortunately, the pattern failed and the dollar continues to rise.
The technical indicators and the strong price action of the dollar since its July low would indicate that a pull back is imminent. HOWEVER, there is no indication that a pull back is happening now. If the dollar continues to strengthen, stocks will continue lower.
Finally, we have to keep in mind seasonality and the Presidential Election Cycle. In the chart below by JC Parets at AllStarCharts.com, we see historical price movement in blue and actual 2023 price movement in red. History tells us to expect choppy price movement through October and possibly into November. Choppy, not a market collapse, and a significant rally into the end of the year.
Bottom Line
On a weekly basis, the C fund is pulling back to a logical support level at the 20WMA and 50RSI. Support at this level is critical for the rally to continue.
On a daily basis, the market is under extreme pressure and still has room to fall before the next reasonable support level at 4350. Support at 4350 is the best case scenario for the C fund at this point. That level is the neckline on the daily Head & Shoulders pattern and just below the 20WMA on the weekly chart.
The S fund, represented by the IWM above, is clearly in trouble. We should expect price to continue down to test the lower channel line. Given the continued rise in the dollar and yield, the I and F funds are not safe havens at this point.
Taking all of this into consideration, we are making a reallocation to 100% G fund in the Grow Model Portfolio.
Optimistically, we will get an opportunity to reallocate back to the stock funds if the seasonal pattern plays out. We absolutely want to be in the stock funds IF the anticipated Q4 rally unfolds. The other possibility is that a major decline began yesterday. If that is the case, the G fund is the best place to ride out the storm.
New Grow Model Portfolio allocation: 100% G Fund
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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.
