Alert Analysis
In the 11 June TSP Weekly Newsletter, we shared the latest short term forecast by Larry Williams dated 6 June. His forecast called for a pull back in June/July and a resumption of the up trend in early August. It certainly looks like his forecast is very timely! But, if you reallocated to the G fund on 6 June, you would have missed an explosive move to the upside. Forecasts and seasonality trends are an excellent baseline. They provide us a bias on the market. A negative bias means we are very cautious and cut losses quickly. A positive bias means we would give price more room to prove the downturn.
As of the time of this Alert, we do not have a sell trigger on the C fund. Having said that, we have multiple indicators that are pointing to a correction in stock prices. Because our bias is negative, we want to lock in the gains from the past couple of months and be ready to get back into the stock funds as conditions warrant.
Risk On / Risk Off
This chart shows the ratio of high yield growth to cash in candle sticks with the S&P500 overlay in orange. HYG/IEF is a "Risk on / Risk off" ratio. When trending higher, the smart money is buying stocks. When trending lower, smart money is buying bonds. We can see that while the S&P has made consistent higher highs in 2023, the Risk ratio failed to confirm those new highs. We also see a big gap down today and a sell trigger for the ratio. The smart money is selling stocks.
The Dollar
This chart is the price of the U.S Dollar in candle sticks with the S&P500 overlay in orange. We can see the clear trend of when the dollar goes up, the S&P goes down. When the dollar goes down, the S&P goes up. The dollar broke to the upside on Friday and is just about to give us a buy trigger. The higher low on the dollar is an indication (not yet confirmed) that the trend of the dollar could be turning up. IF the dollar continues higher, the S&P comes under continued pressure.
Bullish Percent Indicator
Next is a very interesting analysis provided by David Keller at StockCharts.com. Since the tech heavy Nasdaq has been leading the S&P higher in 2023, we'll look at the NDX. The top chart below is the NDX. The lower chart is the Bullish Percent Indicator for the Nasdaq. We can see that each time the BPI for NDX go above 70 and then rolled over, this lead to a significant correction in the NDX. When the indicator gets below 30 and turns up, price has hit a major low. The indicator hit 72 last week and rolled over this week.
TSP Charts
On a weekly basis, the C fund chart doesn't look bad. It's very reasonable to expect a pull back week following 5 consecutive positive weeks. Price is very far extended from the 20WMA. If you're making reallocation decisions based on weekly charts, you'd have to accept a 4.36% decline down to the 20WMA before the decision point. That's the trade-off of using weekly charts. You're less likely to get whipsawed but you have to accept a higher short term percentage risk.
On a daily basis, the C fund is still above its 20DMA, RSI is well above 50 and MACD is just about to cross to the down side. We DO NOT have a sell trigger on the C fund. However, we have a ton of other supporting evidence for this reallocation.
If this rally is to continue, we need to see support at the 20DMA which corresponds to support at the August 2022 high. Support at this level would be very bullish. A breakdown at this level would be very bearish.
The S fund is disappointing. The fact that the S fund is rolling over more than the C fund indicates that the breadth expansion that we need to see is likely not happening. We really wanted to see the S fund above 1850 before a meaningful pull back. We are very close to a sell trigger on the S fund with price right on the 20DMA, RSI just above 50 and MACD already crossing negative.
We had a monster gap down for the I fund today. More importantly is the divergence between price and RSI. Price consolidated at 72 in April/May then peaked at 74 in June. RSI put in a lower high in June. This divergence between higher highs in price and lower highs in RSI is a big red flag that resulted in a sell trigger today for the I fund.
The F fund is essentially directionless in the short to medium term. Price has been flat since December 2022 and literally flat since the end of May. The F fund is not a great alternative to the stock funds at this point.
There is no chart for the G fund but, at a guaranteed 5% risk free annual rate of return, it's hard to beat in the current environment.
Bottom Line
The cards are stacked against the market. The risk of a significant correction far outweighs additional gains in the short term. The mega-cap tech stocks that have been driving the market higher are pulling back, with the rest of the market no longer taking up the slack.
We don't necessarily have to see a collapse in price. The market just needs to consolidate and work off some of these overbought levels. We could easily see a mild pull back that sets us up for a resumption of the rally in August. OR we could see a significant move to the downside. Either way, there is very little upside potential in the short term relative to the downside risk.
New Allocation: 100% G Fund
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.
