Sunday Update: 04 November 2018

FINALLY a week with decent gains for the TSP stock funds; relatively decent anyway…  The C fund gained 2.42%, the S fund gained 4.21%, and the I fund gained 3.13%.  HOPEFULLY the C fund hit a bottom on Monday at 2600 but, hope is not a strategy! 

While the C fund closed higher for the week, the intra-week low was lower than last week, and the intra-week high was also lower than last week.  This is not a good sign.  Also, on Friday the price ran up to the 50WMA and then reversed.  Again, not a good sign.  We need to see the price chart get above the 50WMA, stabilize, and move higher before I will be comfortable that this correction has ended.  See the chart below.

So what has “caused” this correction?  There is no shortage of negative opinions as to the cause, expected duration, and expected depth of this correction.  Trade war with China, fear of inflation, and rising interest rates just to name a few.  There is also no shortage of “good news” stories that argue for a short correction and then new highs going into 2019.  03 November 2018 Front Page headlines include “Wages Rise as Hiring Accelerates” – Wall Street Journal, “Employers add 250,000 New Jobs as Economy Hums” – New York Times, “Hiring Surges, Wages on Rise” – Washington Post.  All good new stories… It’s pretty easy to find data that supports both opinions of what the market will do going forward.  Rather than trying to predict based on opinion, let’s take a look at 2 current realities that we know will effect the market going forward.  

The FED tinkers with the economy by moving interest rates up and down.  The chart below shows the 10 year treasury yield since 1982.  After wild rate swings in the early 1980s, rates settled into a very long term decline.  Ultimately this decline bottomed in 2012 and tested those lows again in 2016.  in early 2018 rates broke up thru the 30 year down trend line, stabilized, and moved higher this month.  This is one of THE MAJOR concerns for the market going forward.  As rates go up, the cost to borrow money goes up.  This puts an increasing burden on individual consumers, large and small corporations, and the federal debt/deficit.  It is a very good bet that rates continue higher from here…

When interest rates go up the cost of borrowing goes up.  This puts long term downward pressure on tech and growth companies, so investors move to consumer staples/necessities.  This is reflected in the chart below of Consumer Staples vs the S&P500 (C fund).  While the C fund was increasing from 2016 thru Oct 2018 investors were pumping money into growth stocks and out of consumer staples, resulting in the down trend of the ratio chart  below.  In the beginning of October, that changed in a hurry!  Investors dumped tech and ran to consumer staples!  This is probably not a flash in the pan…

So where does all of this leave us with respect to TSP?  In the short run (the next 6 months) it means volatility will continue and market risk is VERY HIGH.  In the long run, markets will adjust to a rising interest rate environment and settle down.  Unfortunately, that settling down process could look very ugly for the TSP stock funds.  Here’s where Elliott Wave analysis is very helpful.  

The fact that the 30 year trend in interest rates has changed at the top of the 5th leg in a 10 year stock rally really worries me.  I really hope I’m wrong about the chart below.  If we do not get above the September 2018 high within the next few months, the chart below COULD be a guide to what the next several years will look like…  

The post was very technical and certainly not optimistic.  However, these are the circumstances that exist right now.  We all need to make decisions regarding our personal TSP accounts and knowing the circumstances helps us make intelligent decisions going forward.  Whether you are just starting your career, are retired, or planning for retirement, now is NOT the time to put your head in the sand and just let it ride…

If you want to know what I’m doing with my personal TSP account, hit the green link and sign up to be a Member of the Site.  I’ll email you an Alert RIGHT BEFORE each reallocation I make.  You can follow along with my moves or use the Alerts to supplement your personal investing strategy.  At $12 per month or $120 per year, it’s a No Brainer…

Please post question to comments and have a great week!

Jerry