Sunday Update: 12 May 2019

Wow, what a wild ride for the TSP stock funds!  This week represented the first real challenge this rally since early March.  For the week the C fund ended down 2.18%, the S fund down 2.19%, the I fund down 2.48%, and the F fund up 0.30%.  Bad as it was, it could have been MUCH worse.  The big question is, was this a flash in the pan or are there more losses to come??  We’re going to put this question in perspective with some charts but first, let’s look at WHY the market tanked this week.

Last weekend the President tweeted that the U.S. was going to raise tariffs (from 10% to 25%) on some $200Bn worth of Chinese goods and products.  The new tariff rate was to go into effect at midnight this past Thursday, barring an agreement at the U.S. / China Trade Talks that took place in DC this week.  As expected, the Asia markets tanked on Monday ahead of Wall Street’s open.  The financial media had us on the edge of our seats in anticipation of a serious crash if the deadline passed without a deal.  When midnight passed, the Asia markets were up big time and U.S. futures pointed to a big positive day on Wall Street.  How can this be??  The market was supposed to crash!  Here’s what the financial experts had to offer…“Investors seemingly continue to try to cling to hope that policymakers on both sides opt to deescalate,” Deutsche Bank’s research strategist Jim Reid said in a note Friday.  Seriously?  Investor hope is why the market didn’t tank?!  To make it even more interesting, the President threatened to expand the new tariff rate to $325Bn in Chinese goods and the market still roared higher on Friday…  How is anyone supposed to make decisions based on the financial news??  Financial news does NOT drive the market.  It’s great entertainment if you’re a finance geek but, I wouldn’t reallocate my TSP based on financial news.  Rant over…  Could we have predicted Friday’s recovery even in the face of all this bad news?  Maybe the charts can shed some light.

Short Term

All 3 TSP stock funds hit important moving average lines this week and found support (for now).  The C and S funds tested their 50DMA lines on Thursday and Friday; managing to close above the line both days.  The I fund fell a bit deeper, finding support at its 200DMA.  We saw this back in October as the C fund found support at the 50DMA for a couple of days before collapsing down to its 200DMA.  Sometimes the moving average lines hold and sometimes they don’t but, there is USUALLY a pause at these levels.  Since Thursday’s reversal with a close above its 50DMA, Friday’s support was anticipated.  The question now is, will this support level hold and will we move higher from here… (see below)

The direction of where money is flowing might help us anticipate the answer to that question.  The chart below shows the ratio of the Consumer Staples index vs the Nasdaq (Staples vs Tech).  When money is flowing into Tech, the market moves higher.  When money flows into Staples, investors are acting defensively and the market moves lower.  The ratio chart has found support at its trend line and APPEARS to be breaking out to the upside.  You can see that the ratio closed at its high for the day on Friday.  That means that even as the overall market was recovering, more money was flowing into Staples than Tech.  This is not a good sign for the overall market going forward.  There are no guarantees but, if this ratio continues higher, C and S fund support at their 50DMA will fail.  

Bottom Line: It was a rough week and I don’t think the pain is over.  We are due for a more significant correction than what we saw this week.  We could get a bit of a recovery rally next week but I would not be “buying the dip” here.

Have a great Mother’s Day Weekend!

Jerry