TSP Weekly Newsletter: 12 February 2023

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Volatility came back to the market a bit this week and it certainly ruffled some feathers. For the week the C fund finished lower by 1.11%, S fund down 3.08%, I fund down 1.05%, and F fund down 1.40%.

In the big scheme of things, the economy is approaching the cliff, at the edge, or has already fallen and doesn’t know it yet. 2023 is going to be an extremely difficult year for any retail investor to make money in the market. Given the TSP rules, it will be that much more difficult for us. If the volatility is getting to you, there is nothing wrong with riding this out in the G fund. With a guaranteed rate of return of almost 4%, it’s not a bad place to be during a year like what is coming.

Having said all of that, if you’re going to stay in the game, you need to let the market breath. The market does not go up in a straight line. The weekly chart of the C fund below shows that the trend is still clearly up since the October low or the December low.

Let’s take a breath and learn how to make decisions in this market environment.

Buy & Sell Triggers

We got a comment on the Members Only Facebook Group this week that said, “Still no Alert?”. Anxiety about seeing red on the screen is understandable but, if you were looking for an Alert this week, you were guessing or hoping with respect to market direction. There was no analytical reason to make a reallocation this week.

We use a number of tools to help us make reallocation decisions. One of those tools is what we’ve termed a “buy or sell trigger”. We’ll look at what defines a sell trigger here. A buy trigger is simply the reverse. The conditions of a trigger having been met does not necessarily mean an Alert will post. The trigger is one data point but, its an extremely valuable one!

A sell trigger is in place on a daily basis when 4 conditions are met. First, price closes below the 20day moving average line. Second, RSI closes below 50. Third, CCI closes below 0. Fourth, MACD has crossed to the downside. All of these indicators do not have to take place on the same day but, they must all be met for the sell trigger to be in place. This has happened 5 times since the top in January 2022. The first sell trigger of 2023 may come soon but, as the chart below shows, it hasn’t happened yet.

Elliott Wave Update

Elliott Waves give us probabilities; they are not designed to be a “crystal ball”. As this market has played out since the top in January 2022, the best fitting pattern that has emerged is the Leading Diagonal Pattern. The Leading Diagonal is not common but, once identified, the rules that define it help us make projections of price movement into the future. You definitely want to hit the link and watch the 5 minute video that lays out the Leading Diagonal rules.

In the chart below, we’re combining a couple of tools and projection techniques. The leading diagonal pattern completed at the October low. The most common corrective pattern to the leading diagonal is an A-B-C correction. If that is the correction that plays out, the length of 5A=BC to complete at the 4350 area. This is very close to the August high. If price closes significantly above 4350, we’re seeing a different type of corrective pattern. We’ll look at that if we get there. Either way, once this corrective pattern is complete, the next major wave of the cycle is down significantly.

One of the best tools for anticipating a top is divergence between price and RSI. Wave BC is playing out in a 5 wave pattern where wave 4 completed on Friday at support at the 20day moving average line. What we’re looking for going forward is price to rise toward the upper trend line and take out the February top. At the same time, we expect to see the RSI make a LOWER high. This tells us that the momentum behind this move is waning and a top is immanent. We don’t always get it but, it’s a huge red flag when we do.

The S fund chart is weaker than the C fund, having only retraced 38% of its losses from January 2022 to the October 2022 low. The measured move of the June low to the August high is equivalent to the move from the October low to the recent January high, and also hits the 38% retracement level.

In the short term the S fund is consistent with the C fund in calling for one more push higher to complete the pattern since the December low.

The I fund has enjoyed a monster rally since the October low, recovering 61.8% of its losses. Price has been consolidating at the 61.8% retracement level for 4 weeks and appears to be rolling over. As we’ve discussed in previous Newsletters, if the price of the U.S. Dollar continues to rise, the I fund will continue lower.

The recovery rally in the F fund looks to be complete and price is likely headed lower. This chart gives us 2 great examples of divergence between price and RSI. In mid-2020, price had been falling for several months. In October 2020, we can see price continuing to make lower lows as RSI is making higher lows. This was a great set-up for the brief recovery in price in late 2020.

In late 2022 we see a price high and a higher high in January 2023. At the same time, we see RSI making lower highs. This was a big red flag and a precursor to price decline we are seeing now.

Bottom Line

This is a very difficult market. We would like to see the S&P500 hit approximately 4300 on declining RSI. That’s our best case target at this point. If the short term pattern plays out, price will hit this area by the end of February which would be an excellent time to lock in gains.

IF the market rolls over and gives us a Sell Trigger, expect to see and Alert. The analysis favors a bit more upside in the short term but, once the pattern is complete, you do not want to be in the stock funds. Wave 3 or C down will likely be very painful.

Stay alert and have a great week!

The Grow My TSP Team