TSP Weekly Newsletter: 16 April 2023
It was an exciting, volatile, and frustrating week for all 4 of the TSP funds. Both the CPI and PPI (Inflation numbers) for March were reported this week, giving us quite a bit of volatility! For the week the C fund finished up 0.79%, S fund up 1.43%, I fund up 1.78%, and F fund down 1.04%.
In this week’s Podcast, we show how to use our favorite tool for identifying tops and bottoms in the market; divergence between price and RSI. That was the technique used to generate the 13 April Alert. In the podcast we cover examples from the 2000 top to present. You definitely want to watch this week’s Podcast!
Can This Rally Continue? Watch the U.S. Dollar.
When the price of the dollar is moving higher, it puts pressure on the price of stocks. When the dollar is falling, stocks tend to move higher. It’s not an exact, day to day correlation but it’s pretty close.
The dollar has been in a long-term up trend since the low in 2008. This trend is easily identified by connecting the low in 2011 and the low in 2021. The major tops could also be connected to form a rising channel for the dollar. The expectation, based on price history going back to 2008, is that the dollar will continue to decline to the up sloping trendline.
If we zoom in to the 2021 low to present, we see that the run up in the dollar corresponds to the decline in stock prices from mid-2021 through October 2022. The late 2022 decline in the dollar corresponds to the stock market rally through January 2023. The dollar rallies and stocks pull back into February, and the dollar’s decline since early March corresponds to the current stock rally.
If we draw measured moves for the dollar decline from October 2022 to January 2023, and apply to the March high in the dollar, we would expect the dollar to fall to the trendline. This is clearly the bullish case for stocks. IF the dollar were to fall back to the trendline stocks would rally sharply.
While the measured move analysis is encouraging, it is not the only possibility; at least in the short term. The daily chart of the dollar shows a potential double bottom pattern emerging. The dollar needs to take out support at 100.8 for the rally in stocks to continue. There are a number of short term possibilities for the dollar at this point. A break below 100.8 is extremely bullish for stocks. A close above the March high at 106 would be extremely bearish for stocks.
Can this rally continue? Yes but, it is highly dependent on what happens with the price of the dollar.
The TSP Fund Charts
If we look at a daily line chart of the C fund since 2021, we can see several possibilities. The primary Elliott Wave count is shown in the chart. In this case, the June 2022 low completed the first major wave down. The rally into August completed the recovery of that primary down wave. If this count is correct, the next major decline, the III wave, is currently playing out in a complex 5 wave pattern. As long as wave (2) does not exceed II, this count remains primary in keeping with the Elliott Wave rules.
The price pattern during the rally from the October 2022 lows is consistent with this primary count. The rally looks to be corrective rather than impulsive. We can see a series of corrective, small waves making up the rally rather than the strong impulse moves we would expect to see if the October 2022 low was the final bottom in this bear market. Things could change but right now, this rally is still very suspect.
In the short term, we need to see price get above the resistance zone between 4200 and 4300. This is absolutely a possibility but, it is not consistent with the expectation of an imminent recession or as we enter what is historically the worst 6 months for stock performance. Price will dictate but it is fighting some significant headwinds.
The S fun is getting ready to move in one direction or the other. Price has been consolidating above the 20DMA line since late March with RSI, CCI and MACD all positive and rising. A close above 1710, taking out the late 2022 triple top would be very bullish. A close below the March 2023 low would be very bearish.
The I fund has been the strongest chart of all 4 TSP funds since the October lows. In this chart, we used a 12 day moving average rather than the normal 20 day. The 12 day better captures the volatility and short term trends of the I fund price action. Given the 2 move per month rule in TSP, a 12 day moving average line is too short for us to use but, it does better identify the short term trends. The goal is to use moving average lines and technical indicators that help identify trends. There is no magic to any one moving average line duration.
We can see that RSI is getting very close to over bought at 70. This has corresponded to the last 2 highs in the I fund. A very likely end of this rally for the I fund is the 0.786 retracement level and the March 2022 high at 76.
The F fund continues to defy the forecast of most analysts. The expectation is that stocks will collapse in the imminent recession, with investors fleeing to the relative safety of bonds. This would give us the long awaited divergence between stocks and bonds. There is NO indication of that happening in this chart. In fact, just the opposite! As of Friday’s close, the F fund gave us a sell trigger with price below its 20DMA, RSI, CCI, and MACD all negative and falling. The price pattern coming off of the October low looks corrective, not impulsive. It is entirely possible that we see a continuation of stocks and bonds falling together in the second half of 2023.
Bottom Line
The rally that we have seen in both stocks and bonds coming off of the October low is still very suspect. The price pattern thus far has been corrective. There has not been a strong, impulsive move in any of the 4 TSP funds that we would expect to see if the October low was the end of this bear market. That could change if the S&P500 was able to close strongly above the 4300 level but, that will be difficult given the seasonal headwinds beginning in May.
We will continue to monitor both the short term and long term patterns, as well as the dollar, to capture any potential gains but cutting losses very short in anticipation of an impending recession this summer.
Have a great week!
The Grow My TSP Team
Hello folks, great weekly newsletter! I have a few questions that if the timing is good, perhaps you could either cover in a future newsletter or podcast.
1) Impulse versus corrective move- you mention both of these price patterns during the newsletter and you do point out what a corrective move looks like. But, any more details on identifying those two types of price actions and how they can help in decision making?
2) You mention in the newsletter how an analyst can use “different” daily moving averages or weekly moving averages than what is “standard” (e.g., 20, 50 and 200 DMA) if the standard DMA’s don’t really fit the price action. But, if most of the professional analysts tend to use the 20, 50 and 200 to make decisions, then if we use something different, might we be at a disadvantage when making trade decisions? Not sure if you’ll be understand my question, but maybe another way I can put it is to ask you what the pros and cons might be of using “unique” MA values from the more standard ones.
(3) Regarding the I fund, it seems like it has been doing fairly well in general for a couple of months, yet you tend to avoid allocating to it and I wonder why. Has the recent past “buy signals” been too weak or iffy so you’ve been fairly conservative on buying into it, or have there been other reasons.
Thanks again, Dave Cobb
Dave,
Great questions! If you have those questions, we know other people do as well. We’ll do a deep dive into those three questions in this weekend’s Podcast. Definitely check it out!
Thanks Jerry! I’ll will definitely listen to the podcast this weekend. Take care.