Sunday Update: 11 February 2018

Wow!  The past 2 weeks have been quite a ride!  We went from years of very low volatility (dramatic market swings) to 2 weeks of HUGE market swings on a daily basis.  The thing about this that makes people nervous is that it seemingly came out of nowhere.  If you’ve been following along with the Sunday Update each week, you know that we have been talking about this for months.  It was not a matter of If but When…  So let’s take a look at where we are, what’s the big picture, and where we’re headed.

The patterns within patterns can be very tricky until you get used to looking at charts of different time frames.  I will break it down below beginning with a 20 year chart and working toward a 6 month daily chart.

Very Long Term

It’s hard to believe but, the chart below is a 20 year monthly chart of the S&P500 (C fund).  Hard to believe because I distinctly remember the tech bubble top and the 50% collapse, followed by the real estate bubble top and the 60% collapse, and on into the easy money bubble that we are in today…  To give you an understanding of just how Very Long Term we’re talking about, the IV leg that completed at the low of 2009 is the 4th leg of the pattern that began following the bottom of the Great Depression in 1932!  We are now in the 5th and final leg up of that multigenerational bull market.  The 5th leg up from the 2009 low COULD be the end of this 75 year bull market or, it could be the first leg of an extended 5th leg that may take decades to complete.  We may not know the answer for several years but either way, the next few years are likely to be very tough.

Long Term

The 10 year monthly charts below give us a shorter term perspective that starts to be useful for making TSP allocation decisions going forward.  All 3 of the stock fund charts show a clear 5 leg pattern, having made huge gains since the low in 2016.  IF Friday’s intra-day low holds for the next couple of months, we SHOULD see some decent gains later in 2018.  

Short Term

Now we get into a time frame where we can make some actual reallocation decisions.  The 2 year trend line on the C fund was broken on Friday BUT, the market rallied and closed above this line.  What we want to see is a few more weeks of sideways movement.  In this case, sideways is anything between 2525 and 2875.  This consolidation would complete the 4th leg and set us up for a new highs and the completion of the 5th leg.  Things would change drastically IF the C fund was to have another big down week…

The 6 month daily chart below is the most useful for making reallocation decisions.  On Friday, the market spiked down and found support at the 200DMA.  This is a CRITICAL support level.  We really want to see this level hold!  The consolidation will likely fluctuate between the 50DMA and the 200DMA for the next several weeks.  Ultimately, we want to see the price get above the 50DMA and then breakout strongly to the upside.  This will be the final confirmation that the long term up trend is still in place and we will be looking toward higher highs in 2018.  Right now, the technical indicators support this, with the MACD and Stochastic very low and the RSI bottoming out.  We’re not out of the woods yet but, things are looking pretty good.  IF we had another big drop below the 200DMA then we would have to reevaluate…

There are lots of moving parts.  This post brought you from a 75 year perspective to a 6 month perspective.  Volatility will continue but now, you have some guard rails as you watch the wild swings to come on the market.  

Please post questions to comments, share with your friends and co-workers, and have a great week!

Jerry