If you've been following the Newsletters and Podcasts, you've seen this chart several times throughout the year. This is the latest version from JC Parets at AllStarCharts.com. The blue line is the average price of the S&P500, our C fund, during pre-election years from 1950 to 2019. The red line is the actual price of the S&P500 thus far in 2023. As you can see, the trajectory of price movement in 2023 has been generally in line with the historical average. If this continues, we should expect chop through October that sets us up for a big rally in November and into 2024.
We all understand what an average is and its value. Ty Cobb still holds the MLB batting average record at .366 over a 24 year career. On average he made a base hit or better more than 1 of 3 at batts over 24 yrs. Some of those years, his average was much higher and some much lower. The point is, for Ty Cobb, each at batt was unique. Stats are great in the aggregate but, each at batt is a new opportunity to succeed or fail. It's no different for the market. While the average chart looks generally sideways from the July peak to November, there are some notable exceptions.
Black Monday
"From Wikipedia, the free encyclopedia
For a list of Black Mondays, see Black Monday.
Black Monday (also known as Black Tuesday in some parts of the world due to time zone differences) was the global, severe and largely unexpected[1] stock market crash on Monday, October 19, 1987. Worldwide losses were estimated at US$1.71 trillion.[2] The severity of the crash sparked fears of extended economic instability[3] or even a reprise of the Great Depression.[4]
Possible explanations for the initial fall in stock prices include a nervous fear that stocks were significantly overvalued and were certain to undergo a correction, persistent US trade and budget deficits, and rising interest rates. Another explanation for Black Monday comes from the decline of the dollar, followed by a lack of faith in governmental attempts to stop that decline. In February 1987 leading industrial countries had signed the Louvre Accord, hoping that monetary policy coordination would stabilize international money markets, but doubts about the viability of the accord created a crisis of confidence. The fall may have been accelerated by portfolio insurance hedging (using computer-based models to buy or sell index futures in various stock market conditions) or a self-reinforcing contagion of fear." - Wikipedia
Black Monday happened during a pre-election year. While stocks did rally into the end of 1987, it took until August 1989 for price to exceed the October 1987 peak. For whatever reason, October tends to be the month of Black Swans for the market. This includes the Bank Panic of 1907, the beginning of the Crash of 1929, and Black Monday 1987.
This is NOT A FORCAST in any way! It is merely something we need to keep in mind as we navigate what actually happens in 2023. With all the hype of an expected rally in the 4th quarter, we just need to be aware that Q4 2023 may not align with the average.
The TSP Fund Charts
From a weekly perspective, the C fund does not look good. We got a sell trigger last week as priced closed below the 20 Week Moving Average (WMA). The top indicator is the ADX index. The green line is buyers and the red line is sellers. We can see that the buyers have been leaving the market and are just barely above the 20 line. More importantly, sellers are coming in with the red line crossing the green to the upside. We also have lower highs and lower lows in price since the July peak. It could turn around but, this is a very week looking chart.
The daily chart tells a POTENTIALLY different story. From a bullish perspective, we have a perfect A-B-C correction down to the 200DMA. Historically, the 200DMA often provides support for price to move higher. We can see that price has found support at this level for the past 4 trading days. Sellers have been decreasing with buyers increasing over the past 2 days as we can see in the ADX indicator. This is a very low risk entry point for the bulls. A close below 4265, the 200DMA, is failed support. 69 points to the downside is the risk with significant upside potential.
From the bearish perspective, the neckline (4334.61) on this head and shoulders topping pattern was violated last week. What was support is now potentially resistance. Since then, price has stabilized and we had a failed retest of the neckline on Friday. A daily close next week above the neckline would be bullish. A daily close below the 200DMA line would be bearish.
The S fund is in a similar situation. It's neckline was violated last week and we had a failed retest of the neckline on Friday as price closed just below the neckline. A close above the neckline next week is bullish. A close below this week's low of 1680 would be bearish.
The I fund is also very similar. A downside break of the neckline happened last week. Friday's intra-day rally failed just below the neckline. A close above the neckline would be bullish while a close below 68 would be bearish.
The F fund is extremely short term oversold which makes Friday's reversal very interesting. The F fund is overdue for a short term recovery rally but, Friday's price action tells us that rally may not happen any time soon.
Bottom Line
We are entering one of the historically strongest periods for stocks. October is frequently a month where significant bottoms take place, as is the 200DMA. IF price action in 2023 proceeds as history suggests, the current price level could be an excellent place to reallocate to the C fund.
From a bearish perspective, the weekly chart of the C fund does not look good with 2 consecutive weeks below the 20WMA. On a daily basis, all of the stock funds are below the neckline of their respective head and shoulder topping patterns with a failed test of the neckline on Friday.
The bias right now is to the downside but, a rally from here is absolutely possible. For the Grow Model Portfolio to return to the stock funds, we need to see a buy trigger. We need to see price above the 20DMA, RSI above 50, CCI above 0, and MACD positive. If you are an aggressive TSP investor, the C fund is giving us a low risk entry point right here. If you are more conservative, you want price to prove a bottom by giving us a buy trigger.
Keep in mind that Monday is a new month. If you make a reallocation on Monday into the stock funds that's your first reallocation for the month. If you reallocate to the G fund on a close below the 200DMA, that is your second reallocation for the month. This puts you in the position of not being able to enter the stock funds again until November. In addition to market risk, that is the structural TSP risk.
Have a great week!
The Grow My TSP Team
