TSP Weekly Newsletter: 05 February 2023

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It was a wild week on Wall Street! The economists, pundits, and financial news media are scratching their collective heads trying to understand the FED announcement on Wednesday and the Jobs report on Friday. It’s all very interesting but has nothing to do with making reallocation decisions in your TSP account.

For the week the C fund finished higher by 1.62%, S fund up 3.37%, I fund down 0.25%, and F fund down 0.02%.

TSP account management is not day trading. We want to be in the stock funds when the market is trending higher and out of the stock funds when the market is trending lower. Moving average lines are a very useful tool to show us price trend over various time periods. What’s even more valuable than following a trend is the ability to ANTICIPATE a trend change. That’s where the relative strength of price movement comes into play.

Price / RSI Divergence

In a normal bull market, as price increases, the relative strength of that movement increases as well. As bull markets approach significant tops, the relative strength of the movement begins to decrease even as price continues higher. This is called negative divergence and helps us anticipate a price reversal.

The inverse is also true. In a bear market, as price continues lower, relative strength decreases. As the market begins to anticipate a bottom, the relative strength of the movement will increase even as price continues to decrease. This is called bullish divergence and helps us anticipate a price reversal to the upside.

The chart below shows the C fund from 1996 to 2010. Within this chart are 2 significant bear markets and their recoveries. From 1999 to the top in 2000, price was increasing as RSI was decreasing. This was a big “heads up” to pay attention for a possible reversal. Once price crossed down through the 50 week moving average line, that was the sell trigger. We see the same set-up at the 2007 to 2008 top. Price continued to make new highs as RSI was making lower highs. We were on notice… Once price broke below the 50 WMA, that was the sell trigger.

The reverse is also true. As price was forming a bottom in 2002 to 2003, RSI was putting in higher lows. This is very bullish price action. Once price crossed above the 50WMA, that was the buy trigger. From late 2008 into 2009, price was making new lows but RSI was making higher lows. RSI was telling us to be prepared for a trend reversal. Once price closed above the 50WMA, that was the final buy trigger.

The next significant correction was the 2015 to 2016 time period. As price was making new highs in 2015, RSI was making lower highs. It was a warning… In this case, the correction was relatively brief. While price put in a lower low in early 2016, RSI put in a higher low. This was a strong indicator that price was unlikely to continue to lower lows.

We can see the same negative divergence set up before the Covid collapse. Price was putting in higher highs as RSI was putting in lower highs. We see the same thing at the 2022 high.

Where is price now? We had bullish divergence between price and RSI at the October low. This put us on notice for a potential trend change. As price began to rally, RSI increased as well. During the December correction, RSI found support and continued higher with price into 2023. Price is now above the 50WMA, with higher highs and higher lows.

There are no guarantees but, from a purely Technical Analysis perspective, we should expect price to continue higher from here. This chart looks much more like the beginning of a new bull market than a bear market rally.

The TSP Fund Charts

If we zoom in to the C fund, we see price ABOVE the down trend line, the 20WMA and the 50WMA. RSI is above 50, CCI above 0, MACD positive and expanding. We can (and we will) look at potential reversal levels but, this chart is clearly bullish.

The S fund has been very strong for the past 2 weeks. Price is now above both the 20WMA and 50WMA with all technical indicators positive and rising. The is a very bullish chart for the S fund.

The I fund chart is much more suspect than the C and S fund charts. We can see that price has hit resistance at the .618 retracement level for the past 3 weeks. RSI and CCI have been flattening, and MACD lost some steam this week. This does not mean that the I fund is getting ready to crash. It just means that its bullish price action is not as strong as the C and S funds at this point.

The F fund is clearly struggling. If you remember back to late December when we covered a large number of professional financial forecasts, stocks were expected to collapse and bonds to move higher in the first half of 2023. Clearly, this has not happened yet. The F fund has not been able to clear resistance at 100 for the past 4 weeks. This week’s huge reversal candle right at the down sloping 50WMA is certainly bearish. The technical indicators are showing weakness vs the strength we see in the C and S funds.

This is why we listen to the pundits but respond to what is actually happening in terms of price.

Bottom Line

There are any number of reasons to doubt this rally. The FED is clearly going to continue raising rates. With such a strong jobs number on Friday, mortgage rates will certainly rise even as housing prices are falling. Recession and inflation are still extremely uncertain. All we can do is observe the look of the charts today vs the look of historical charts. Today’s chart of the C fund, our proxy for the overall market, looks very strong.

This is not the time to be on the sidelines in the G fund. Every bullish trigger has been met. Things could change quickly but, for now, every technical indicator points to price continuing higher.

Have a great week!

The Grow My TSP Team