It was another rough week for the TSP stock funds…  For the week, the C fund was down 3.94%, S fund down 3.99%, and I fund down 3.62%.  There is still no value in looking at the short term charts.  The market has gone straight down since the beginning of October.  Painful as it is if you’re invested in the stock funds, the last several weeks have not been tradable for TSP investors.  The 2 major TSP restrictions (having your reallocation in at noon to get that days closing price and the 2 move per month rule),  have us hamstrung.  If you’re currently invested in the stock funds you have a choice.  You can either reallocate to the G fund and accept the losses or, you can let a pattern emerge and reallocate based on reason.  Neither choice is wrong.  If you are losing sleep over continued paper losses then move to the G fund.  At some point, a pattern will emerge and the market will become tradable again.  The alternative is to hold on for a recovery rally and attempt to recoup some of those paper losses.  It comes down to your personal risk tolerance.  

Since we do not have a short term trend, we’re going to broaden the perspective and look at the C fund on a very long term basis in this post.  We’re going to analyze the S&P500 (C fund) for the past 20 years, on a monthly basis, to see where the ultimate bottom may be.  Then we’re going to look at the C fund on a 3 year weekly basis and look at a possible topping pattern.

The C fund is down 8.76% so far for the month.  We have not seen a 1 month drop like this 2011!  This is a major test of the rally that began in 2009 and the indicators really help us understand the significance.  This is the 4th time in the past 20 years where the MACD, Stochastic, and RSI indicators all turned negative on a monthly basis from over bought conditions. Each time we saw a significant drop in price.  When the indicators turned negative in 2000 the price ultimately dropped 50%.  When the indicators turned negative in 2007, prices dropped almost 60%.  The current price drop, while significant, is likely just the beginning…  

Where do we expect the current the current bear market to ultimately bottom?  Fibonacci levels can be a great guide as the decline continues.  The most common retracement levels are 38%, 50%, and 62% which are illustrated on the chart below.  A 38% retracement takes us down to about 2100; the last major high in 2015.  A 50% retracement takes us down to about 1800; the low of the last 4 leg.  The 62% retracement level takes us down to about 1600 which is the top of the Super Cycle 4 leg.  Any of these are possible bottom levels for the current bear market.  Again, this is a 20 year chart!  It will take months if not years to hit a final bottom.  There will be short term bottoms and recovery rallies along the way that will provide opportunities to grow our TSP accounts even as the long term trend continues down.  In the big scheme of things, this is NOT the time to leave all of your money in the stock funds and just let it ride!       

The 3 year weekly chart below is very telling.  Last week the market tried to find support at the trend line.  This week that support was crushed!  This trend line will likely act as resistance to the next recovery rally.  If we see a recovery rally up to this line and then stall, that could be a perfect time to reallocate to the G fund. 

As painful as the past few weeks have been, the real bear market will come following a topping pattern that precedes a trend change.  As long as we have higher highs and higher lows, the trend is up.  Right now, the trend is still up.  The September high was higher than the January high and the current low is still above the February low.  If the next recovery rally does not take us to new highs then a major topping pattern will be observable on the chart.  A very common topping pattern is the Head & Shoulders (H&S) Top.  An H&S topping pattern USUALLY resolves to the downside.  If we get a recovery rally (right shoulder) and then roll over below the Neck Line, a new long term down trend will be confirmed.  That’s when prices will really drop…  *This is just one POSSIBILITY*

We have been talking about a LONG TERM top for the past year.  It is very possible that we have seen that top.  The September high of 2940 COULD be a top that we don’t see again for several years.  The next few months are critical.  If you’re in the stock funds now, look to the next recovery rally as an opportunity to reduce losses and move to the G fund.  If you’ve been in the G fund for a while, look at the next recovery rally as a short term opportunity to make some serious gains OR watch the circus from the sidelines.  It’s gong to be a wild ride for the remainder of 2018!

Have a great week!

Jerry