Sunday Update: 29 December 2019

Wow!  Santa was very good to the market this year!  During the final weeks of December and the first couple days the following January, the market historically moves higher.  This is known as the “Santa Clause Rally”, and we sure got one in 2019!  Adding to last week’s strong gains, this week the C fund advanced 0.58%, S fund up 0.06%, and the I fund gained 0.66%.

As we discussed last week and seen in the 12 year C fund chart below, we are currently in the 5th and final leg of the rally that began at the low of 2009.  There is no way to predict how long it will take for the 5th leg to complete.  3300 is an important milestone.  IF we can exceed 3300, we could go significantly higher before topping out.  On the other hand, this has already been the longest expansion in U.S. history.  The 5 leg has already exceeded the top of the 3 leg (the only rule for a 5 leg), and there is a ton of math that shows a major top is imminent.  That’s the big picture of where we are in the cycle so, how do we play it going forward?

Because we are in the 5th and most volatile leg, we need to have very clear guard rails to allow prices to run higher but also protect us from the inevitable downside.  Moving Average Lines on the 1 year charts will provide those guidelines. 

Reallocating based on the 10DMA (Day Moving Average) was a great strategy in 2019.  Being in the stock funds when the price was above the 10DMA and in the G fund when the price was below the 10DMA would have enabled us to enjoy the vast majority of the 2019 gains and avoid the majority of the losses.  It’s not a perfect strategy as you can see from the chart; we took a small loss getting out then back in at the beginning of December for example.  Overall, this was an excellent strategy for 2019 and I expect it will continue for 2020.  

You also see support at or near the 200DMA in June, August, and October.  The C fund is currently sitting about 4% above its 50DMA and almost 9% above its 200DMA.  The next correction may find support at either the 50DMA or 200DMA but, a 4%-9% loss is not acceptable or necessary.  The C fund is currently sitting just 1% above its 10DMA.  This is a much more acceptable downside risk, and manageable given the monthly reallocation restrictions.

For the year, the S fund chart below turned out to be very similar to the C fund.  Both had big run ups in the first few months of the year, 6 plus months of consolidation, and a big run up in the 4th quarter.  The 10DMA was also a useful guide for the S fund but, higher volatility of the S fund would have had us jumping in and out too frequently for TSP purposes.

The I fund chart is similar to the C and S charts with even more volatility and some additional short term consolidations.  The I fund price movement in late December is a great example of how to utilize the 10DMA.  The I fund broke up from the 10DMA and thru overhead resistance at 68.  It then had 2 more very big advances before consolidating back down to the 10DMA.  It hit the 10DMA on Wednesday and broke higher again on Thursday and Friday of this week.  

Bottom Line:  The 5th leg tends to be the most volatile.  We COULD see some very big gains in early 2020 but, a major top is certainly fast approaching.  Watch the 10DMA on the C fund closely and act accordingly…

Here’s to a very Happy New Year everyone!  Cheers!

Jerry