Sunday Update: 24 March 2019

It was a very exciting week for the TSP stock funds, the F fund and ultimately the G fund.  This is going to be a long post as we have several time frames to view for perspective and some very technical market developments that happened this week.  We’ll look at the long term, short term, then 2 events that happened this week that really put the market in a tailspin.  

For the week, the C fund was down 0.77%, S fund down 2.22%, I fund down 1.40, and F fund up 0.85%.  The G fund is pegged to the yield of long term treasury and other bonds.  While it cannot have a negative quarter by statute, as the yield continues lower, the rate of return on the G fund will continue to decrease.  More on this later.  

Long Term

Let’s begin with the long term perspective.  The 12 year weekly chart of the S&P500 (C fund) below shows the last major market correction (2007-2009), the subsequent rally (2009-2018), and the current correction (2018-?).  We are at a critical juncture in the long term perspective.  The C fund exploded off of its 200WMA in December 2018 and currently sits just above its 50WMA.  There are 3 key points to watch over the next few weeks/months.  First is the 50WMA.  If the C fund closes below its 50WMA, it is likely to go down to test the 200WMA again.  Second is the 200WMA. If the 200WMA does not hold, we should expect a final low of 1800-2000 or possibly lower.  Third is the October 2018 high.  If the rally continues and the C fund has a weekly close above the October 2018 high then, this wave count is incorrect.  We’ll address that if/when it becomes necessary…

Short Term

The C fund had a huge positive day on Thursday following remarks made by the Chairman of the Federal Reserve (FED) on Wednesday afternoon.  More on the impact of these remarks later.  The market then reversed on Friday and closed down almost 2%.  The Support/Resistance line is important here.  If this line does not hold, the next resistance level is the 200DMA followed closely by the 50DMA.  There are lots of intersecting points of support so, if none of these supports hold, the market is likely to go much lower…

The S fund collapsed thru its 200DMA and is sitting at its 50DMA.  If the 50DMA does not hold, the S fund is likely to head significantly lower.  A rebound up from this level would be very bullish.  The S fund is mostly tech which tends to lead the C fund.  Watch the S closely over this coming week!

The I fund has collapsed down to its 200DMA.  A rebound up from here would be very bullish.  A drop down to its 50DMA is certainly possible.  A close below its 50DMA would be very bearish.

I don’t ordinarily track the F fund because it doesn’t usually generate enough gains to outweigh the safety of the G fund when stocks are correcting.  However, the F fund broke out of a long term triangle consolidation in December 2018 on Giant Volume.  As interest rates continue to fall, the F fund will continue to rise.  If stocks roll over from here, the F fund will likely be the best place to wait out the correction in stocks.

This Week

So what happened this week that has the market so out of wack?  First, on Wednesday afternoon the Chairman of the FED gave an important speech regarding interest rates going forward. The key points of Chairman Powell’s speech included no new rate hikes for the foreseeable future, stop liquidating Treasury holdings in September, and use its Mortgage Backed Securities portfolio proceeds to buy more treasury securities.  This is a way of allowing more money into the system without increasing the FED’s balance sheet.  It’s a new form of quantitative easing.  When the FED eases monetary policy, interest rates come down as can be seen in the 10 year treasury chart below.  This means that stocks become more attractive as an investment than bonds.  It also means that the rate of return for the G fund decreases…

Chairman Powell’s speech SHOULD have pushed the TSP stock funds higher, and they did go significantly higher on Thursday.  Unfortunately, on Friday morning we had the second major event of the week.  What is known as “an inversion of the yield curve” is one important indicator of a slowing economy and possible upcoming recession.  We’ve been hearing about a slowing global economy for over a year as the yield curve has flattened but stocks continued to rise in the face of it.  The yield curve inverting on Friday is significant but does not imply that a recession is imminent.  For more on this, checkout this CNBC article.  

Bottom Line: There is A LOT going on in the market.  My focus going forward will be on the 50WMA, 200WMA, and October 2018 highs on the C fund as well as the S fund in the short term.  

Have a great week!

Jerry