TSP Weekly Newsletter: 04 June 2023

Coming off of last week’s bullish reversal, the market powered higher this week; and it was NOT led by the tech sector! For the week the C fund finished up 1.83%, S fund up 3.34%, I fund up 0.71% and the F fund up 0.80%.

We’ve been following JC Parets at AllStarCharts.com for the past several years. JC is not what you’d call a “Perma-Bull” but he definitely leans to the bullish side… He was one of the very few that called the October 2022 low as a major market bottom! In fact, from his analysis, the June 2022 low was actually the bottom…

In his blog post on 31 May, JC asks the question, “Do we get rotation into the sectors that led this market off the lows last June?”. Why is this an important question? As we’ve been discussing for the past couple of weeks, the Tech Sector is the only game in town right now. And within the sector, it’s really just a small number of Mega-Cap tech stocks that are driving prices higher. That could be changing as of this week.

There are only 3 possibilities going forward. First, tech could pull the remainder of the market up with it. Second, the remainder of the market could pull tech down with it. Third, we get a rotation out of tech and into the sectors that have been lagging in 2023.

The chart below shows all 11 sectors within the S&P500 from the June 2022 low through the end of 2022. We can see that the sectors are all going up and down together. At the end of the year, the leaders were Energy, Industrials, Health Care, Financial, Consumer Staples, and Utilities. Tech was barely positive while Consumer Digressionary and Communication Services were a drag on the overall index.

This trend changed in a big way on 01 January 2023! We can see that, since the beginning of the year, Tech, Communication Services, and Consumer digressionary are vastly outperforming the remainder of the sectors. In fact, all of the other sectors are negative so far this year! If tech rolls over and the remainder of the sectors continue their down trend, then the overall index collapses. We need to see the bottom 8 sectors begin to turn up. This way, even if tech does roll over, the index can continue to move higher. It’s possible that we saw the beginnings of that this week…

The table below, from StockCharts.com, gives us each sector’s performance this week. We can see that many of sectors that have been under performing year to date had a very strong showing this week. Tech was still positive for the week but, it under performed the majority of sectors in the index. This is an example of Sector Rotation. This is the kind of price action that we need to see for the rally to continue.

The TSP Fund Charts

Since we covered the short term charts in the Alert Analysis that posted on Saturday, we’ll look at the long-term charts here for a wider perspective.

Below is a 10 year weekly chart of the C fund. The 20 Week Moving Average (WMA) line is in blue and the 50WMA line in red. Over this time period, the 20WMA has been below the 50WMA only 4 times. All 4 correspond to significant market corrections. We see that for the vast majority of the time, the 20WMA is above the 50WMA. We also see that, once the 20WMA crosses up through the 50WMA, a new long-term rally has begun. That cross happened in late March of 2023 and this week’s price action confirms the rally.

The 10 year weekly chart of the S fund, while more volatile, paints the same picture. The 20WMA was below the 50WMA 4 times, corresponding to 4 significant corrections. With this week’s breakout in the S fund, the 20WMA has just barely crossed up through the 50WMA. We need to see the rally continue but, this is a big step forward for the S fund.

The I fund is a bit more volatile but the concept remains the same. We want to be in the I fund when the blue 20WMA is above the red 50WMA. It’s as simple as that.

The 10 year weekly chart of the F fund clearly shows it’s historic collapse since its peak in 2020. The F fund has been consolidating since late 2022, giving a chance for the 20WMA to catch up to the down sloping 50WMA. This is the worst looking chart of the 4 TSP funds. With the 50WMA line sloping down, a cross to the upside is suspect until the slope of the 50WMA becomes positive.

Bottom Line

Understanding sector rotation, and watching it over time, can help us anticipate the longer term direction of the market. This week’s breakout that was lead by 2023’s laggers is a clear sign of positive sector rotation. One week does not make a trend but, when combined with a longer term view of the trend, we get a good sense of its stability.

As long term TSP investors, we want to be on the right side of the trend. The trend is easily identified using the 20WMA and 50WMA. Despite all the fear and angst in the economy and financial markets, the long term trend of the stock funds is up; until it’s not…

Have a great week!

The Grow My TSP Team


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