Sunday Update: 21 October 2018

Week 3 of October is in the record books.  If you just looked at the price from last Friday to this Friday, things don’t look that bad.  The C fund was actually up fractionally while the S, I and F funds were down slightly.  Unfortunately, the big picture of price movement paints a different picture…  For the week the C fund was up 0.02%, the S fund down 0.32%, the I fund down 0.17%, and the F fund down 0.36%.  

There is no value in dissecting what happened with the individual TSP funds this week.  I’m going to put up the 5 year weekly chart of the C fund that will give us a snapshot of where we are.  The focus this week will be on ratios, a tool that I use in addition to TSP fund charts to identify and track market trends.  

The objective is to be in the stock funds when the overall market is trending up and in the G fund when the market is trending down.  The key here is TREND.  We want to ride the trend like a wave; whichever direction it’s going… This philosophy of investing will keep you on the right side of the market 80%-90% of the time.  The tricky part, and the time that we will take some losses, is when the market trend changes.  We are living thru one of those times now!  The market has been trending up, in the long run, since 2009; and in the short run since 2016.  The current breakdown COULD be the beginning of a long term trend change. We do not know yet.  One tool we can use to forecast a trend change is Ratios.  Before we get into that, let’s take a look at the 5 year C fund chart.

The weekly C fund chart below shows the price having found support at the moving average line.  In fact, every time the price hit this line since mid-2016 it has moved higher.  We are currently above the moving average line, barely.  We would have liked to see the week close at the top of the weekly price range but, the bottom line is we are still above the moving average.  A weekly close below this line is a game changer.

The chart below is pretty complicated but gives us a ton of information.  The primary chart (red, black lines) represent the Consumer Staples Index divided by the S fund.  Why would we chart this and how does it help us?  Consumer Staples are things that people buy every day.  Things like toothpaste, paper towels, and cigarettes are staples.  People will buy these products even when the economy is doing badly.  The opposite type of products are Apple watches, Uber rides, Netflix, and other non-essential tech products that people buy when the economy is doing well.  When people feel good about the economy and the future they invest in tech.  When they are worried about the future, they invest in staples.  

If the numerator of the ratio (staples) is decreasing and the denominator (tech) is increasing, then the trend of the chart is down.  It makes sense that when the chart of this ratio is trending down, the economy is doing well and the price of the S&P500 (C fund) is increasing.  That’s what we saw from early 2016 to mid-2018 on the chart below.  From June 2018 to September 2018 we saw the chart of the ratio change course.  More people were buying staples and less buying tech.  Ultimately the down trend line was violated this week with a huge spike up.  This spike clearly stands out and is likely the beginning of a trend change.  

We also have the weekly C fund chart displayed in blue.  We can see that when the ratio chart is topping, the C fund chart is bottoming and vice versa.  On the ratio chart, the upper trend line was violated. On the C fund chart, the lower trend line was violated.  Eventually the 2 charts will intersect but not until the C fund price moves significantly lower…

This post is a very different than most Sunday Updates.  It shows pretty clearly the direction the market is headed over the next several months to years…  

If you want to know how/when I reallocate within my personal TSP account, become a Member of the site.  I send Alerts to this group BEFORE I make changes to my personal TSP account.  You can choose to follow along or use the info in combination with other advice and your risk tolerance.  At $12 per month it’s a No Brainer!

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