Sunday Update: 26 April 2020
While we saw a volatile beginning, it was a consolidation week for the market. For the week the C fund was down 1.32%, S fund down 0.20%, I fund down 0.95%, and F fund up 0.09%. We’re going to look at all 3 TSP stock fund charts later in the post. First let’s take a look at a term that’s been in the media for the past two weeks; a “V shaped vs a U shaped recovery”.
We are in a V shaped recovery right now. The market hit a low back on 23 March and has been moving steadily higher ever since. The big question is, can this rally continue and take us to new all-time highs? We will ONLY know the answer to that question in hindsight…
V Shaped Recovery
As the name implies, a V shaped recovery follows a sharp downturn in price with little or no consolidation at the bottom. The C fund chart below shows the long term V bottom following the December 2018 low, and the short term V bottom following the June 2019 low. As you can see in the chart, V bottoms/recoveries tend to be symmetrical. You can see numerous V patterns in the chart below. Sometimes a V recovery takes prices to new All-Time highs, sometimes it does not…
U shaped Recovery
A U shaped recovery is a much different animal! A U shaped recovery follows a major price decline that results in systemic structural damage. This often takes a VERY long time to resolve. A good example is the Nasdaq Composite (Tech) Index following the Dot Com bubble in 2000. As you can see in the chart below, this U shaped recovery took 15 YEARS to complete from peak to peak…
Take a good look at the price from January 2000 to January 2001 below. Following the initial collapse, we got a V shaped recovery of about 50% of the loss. It was after this recovery that the real collapse happened… This is everyone’s biggest FEAR on Wall Street right now.
TSP Stock Funds
All 3 charts of the TSP stock funds are very similar this week. On the plus side, all 3 have consolidated since early to mid-April and are fighting to stay above their respective 10DMA lines. On the negative side, they are all bumping up against significant resistance at Fibonacci retracement levels and their respective 50DMA lines. I want to see a REAL breakout (on big volume), like we saw on 6 April, before increasing % allocation to the stock funds.
Bottom Line: We are living in a world of incredible uncertainty. Given the level of current and increasing unemployment, the ongoing health crisis, and a vaccine that is 12 to 18 months away at best, I am NOT optimistic that the V recovery we have enjoyed since 23 March will continue for long. Having said that, the price movement, moving average lines and technical indicators will drive my reallocation decisions.
Have a great week!
Would another positive close tomorrow above the 50 MA greatly increase the chances of moving up towards the 200 MA versus rolling over?
The short answer is yes. Prices could move incrementally higher to the 200DMA. I am very suspect of prices moving higher because of Volume (or lack of it!). We need to see a Breakout day on BIG Volume. Today and yesterday the S&P was up but on decreasing volume each day.