It was a very low volatility week for the TSP stock funds. Strangely quiet as the S&P500 (C Fund) slowly rolled over to make a short weekly reversal pattern. I’m trying to find a reason to be invested in this market and I can come up with only one. Despite everything else, there is an old Wall Street adage that says, “The Trend is your Friend!”. While all the technical indicators, across multiple time frames, show that we are over due for a correction, the reality is that the trend of the price chart is still up. For some people, that’s reason enough to be invested in the stock funds. For others, the threat of an imminent top is enough to keep them out of the stock funds. At the end of the day, YOU need to make the decision that will allow you to sleep well at night.
Divergence (moving in opposite directions) is a word you don’t hear very often but, it’s pretty important when looking at technical indicators and how they relate to the price chart. When the market is moving strongly, either up or down, the technical indicators will be moving in the same direction. As the trend in that direction begins to change, you will get a divergence between the price chart and the indicators. As you look at the Long Term charts below, you’ll get the idea of how it works and why divergence is important to see.
The market was pretty subdued this week, ultimately finishing about where it started. With MACD, Stochastic, and RSI all turning down along with the price chart, I don’t see anything positive about the short term chart.
The long term charts below are all similar in terms of divergence between the price charts and the technical indicators. When the market turned up after the election in November 2016, the technical indicators turned up also. They all moved up in tandem until the late February 2017 top on the C and S funds and the late May top on the I fund. At that point, while the price chart continued up, the technical indicators began to trend down. This divergence in the long term charts indicates weakness in the market and is a caution flag. At the end of the day, price is what matters but, we use the technical indicators to anticipate what is coming next. Divergence is not useful for timing an exact top or bottom in the market but, it does signal a change is coming.
Next week is the last trading week of September and the last week of the quarter. The big guys want to lock in gains for the quarter so, I wouldn’t expect any major changes next week. If a significant correction is coming it will likely begin in October, as has happened many times in the past.
Have a great week!