It was another strong week for the stock funds but bonds (the F fund) continue to struggle. For the week the C fund finished up 0.39%, S fund up 1.14%, I fund up 0.25%, and the F fund down 0.12%
The debt ceiling drama is behind us so it’s smooth sailing ahead right? Not necessarily… Obviously, if the U.S. Government defaulted on its debt obligations, the market would have taken a hit. We’re past that but, that’s only the first half of the problem.
Now that the Treasury has authorization to pay the bills, it needs to fill the checking account. The federal checking account was down to basically zero at the end of May. How does the treasury refill the checking account? Raise taxes? Take money from other obligations? No, the Treasury will create new debt in the form of Treasury Bonds and sell them in the open market. The creation of these bonds adds to the national debt AND pulls money out of the system.
How it adds to the national debt is pretty obvious but, how does this pull money out of the system and why does that matter? Investors, pensions funds, foreign governments, etc, will buy the newly issued bonds rather than investing those funds in the market. This pulls money out of the system and will act as a headwind for stocks. How much of a headwind is the question…
We have enjoyed a nice rally since the beginning of May but, we are in the middle of what is seasonally the worst time for stocks. It would not be surprising to see a pull back or consolidation over the next several weeks. Larry Williams at iReallyTrade.com just came out with a new short term forecast. He’s calling for pull back from mid-June to mid-July, and then a resumption of the rally. You can watch his full forecast here. Bottom line, don’t get complacent!
Sector Rotation Continues
In last weekend’s Newsletter, we looked at a recent email from JC Parets discussing Sector Rotation and it’s importance if this rally is going to continue. This weekend’s Podcast breaks down all 11 sector charts. Watch that podcast to see how each component of the S&P500 (C fund) is trending. It will help to understand the price movement of the overall index.
The table below comes from the homepage of StockCharts.com. It’s a screenshot from last Wednesday and is a good example of the rotation that is taking place. Tech, Communication Services, and Consumer Discretionaries have been leading the S&P500 higher in 2023 but they were down significantly on Wednesday. Fortunately, the previous laggers picked up the slack and the index was only down 0.38% for the day.
The C fund was up 0.39% for the week even as Tech was down 0.53%. We can see Energy, Industrials and Financials gaining significantly this week. That’s bullish price action!
The TSP Fund Charts
The C fund poked up through the 4300 level on Friday but reversed and closed just below. Price is right at a double top with the August 2022 high and the 61.8% Fibonacci retracement level. This would be the perfect time for the C fund to roll over BUT, it has not happened yet! RSI has room to move higher and MACD has only recently crossed positive. This is a bullish chart. We just need to be aware of the potential for a pull back and respond accordingly.
If we pull back and look at the S fund, we can see a potential triangle consolidation pattern emerging. In the short term, the Head & Shoulders pattern that we have been watching has failed and price is moving higher. The next resistance level is that down sloping channel line. A rejection there would be a big red flag. A breakdown below the lower channel line would mean another major leg down. Usually, a triangle pattern resolves in the direction of the previous trend, which was down. This is the long term bearish possibility that we need to watch closely.
The I fund is an example of what we hope to see on the C fund. The I fund hit its 61.8% retracement level in January 2023. It then pulled back to higher lows and continued to rally. We could see this type of price action on the C fund over the next several weeks.
The F fund chart does not look good. We have a very clear Elliott Wave pattern that needs one more leg to the downside to complete. There are other possibilities. We could get a retest of the October lows (a double bottom), and then an explosive move to the upside. When interest rates begin to fall, the price of the F fund will go up. As the FED continues its rate hiking cycle, it puts continued pressure on the F fund.
It’s a dangerous time to be in the stock funds. The C fund is bumping up against the August 2022 high and the 61.8% retracement level. The S fund looks like it’s setting up for another leg to the downside unless the triangle pattern fails. The I fund is looking pretty strong but is highly dependent on what happens with the dollar. The F fund looks like it’s rolling over for one more leg to the downside. We are in the middle of the historically worst season for stocks, and Larry Williams is calling for a pull back over the next 4 weeks…
Having said all that, the C and S funds are moving higher! We have no divergence between price and RSI and we are no where near a sell trigger on the C or S funds. We need to be aware of the current market environment but not get scared out based on emotion…
It could be an exciting week with the FED making an announcement on interest rates on Wednesday at 2PM. The consensus seems to be that the FED will pause and not raise or lower rates in June. The alternative would be a 25 basis point hike. How the market will respond to either of these scenarios is anyone’s guess…
Have a great week!
The Grow My TSP Team