TSP Weekly Newsletter: 19 February 2023

It was another volatile week for the market but, in the end, very little price movement. For the week the C fund closed down 0.28%, S fund up 1.50%, I fund up 0.50%, and F fund down 0.43%. Why all the volatility? Two important inflation reports came out this week; the CPI and PPI. Both showed a higher than expected level of ongoing inflation and are important metrics for the FED in determining interest rate policy. We do a deep dive into the CPI and PPI in the TSP Weekly Podcast this weekend. You definitely want to check it out!

We had a question in the Members Only Facebook Group this week regarding the VIX. It’s a widely used indicator that can also be traded in a brokerage account. The VIX can be used in a variety of ways. We’ll take a look at the basics below.

What Is the Cboe Volatility Index (VIX)?

From Investopedia, “The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.”

VIX vs. S&P 500 Price

Volatility value, investors’ fear, and VIX values all move up when the market is falling. The reverse is true when the market advances—the index values, fear, and volatility decline.

The price action of the S&P 500 and the VIX often shows inverse price action: when the S&P falls sharply, the VIX rises—and vice versa.

As a rule of thumb, VIX values greater than 30 are generally linked to large volatility resulting from increased uncertainty, risk, and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets. Investopedia

The chart below shows the VIX overlayed with the S&P500. Here are a few takeaways:

The VIX spikes due to major economic events (several noted).
When the trend of the VIX is down, the trend of the market it up.
No major spikes in the VIX in 2022! (Bear Markets don’t usually end in a whimper)

Using the VIX for TSP Fund Management

The VIX is specific to the S&P500, our C fund. There is no VIX for the S, I or F funds. If you look at a candlestick chart of the VIX, it is extremely volatile. One good way that we’ve found to use the VIX is as an indicator with the 5 period moving average.

The weekly chart below shows the S&P500 in black and the 5 week moving average line of the VIX in blue. Looking at the moving average rather than the VIX itself, helps to minimize the noise in the chart. The big takeaways, when the VIX is putting in lower highs, you want to be in the stock funds. When the VIX is putting in higher lows, you don’t want to be in the stock funds.

When the VIX broke below its up sloping trend line in late 2022, that was an important observation. When it closed below 21 in early January, taking out the August low, it really fueled the current rally.

VIX Bottom Line

When the VIX gets relatively oversold, look for at least a short term top in the stock funds. When the VIX gets relatively overbought, look for at least a short term bottom in the stock funds. We have not seen a major spike in the VIX throughout this entire bear market. This is just one data point that suggests that we have not yet seen the bottom.

The TSP Fund Charts

Taking a longer term view to start, the C fund has put in two consecutive down weeks. The market never goes up in a straight line and we need to let it breath. Both of these down weeks finished off the lows for the week and with relatively small losses. There is no indication YET of a breakdown in price.

The technical indicators still look strong with RSI above 50, CCI above 0, and MACD still positive. The measured moves call for another move higher to the 4300-4350 area (the August high).

On a daily basis, we can see how orderly the consolidation has been over the past two weeks. While Friday’s price action was a nail bitter, the C fund closed the day right on the 20DMA. The late day reversal to close on the 20DMA line shows that the Bulls are still out there and trying to hold the line. The measured move indicates a likely top at about 4350, and the short term Elliott Wave count needs one more push higher to complete the pattern.

On the other hand, the technical indicators are deteriorating. RSI is just above 50, CCI is below 0, and MACD has already turned negative. * A daily close below 4060 is my line in the sand *

The S fund chart looks similar but better than the C fund. Price found support at the 20DMA on Friday and rallied to close almost at session highs. Technical indicators still look strong but have weakened over the past 2 weeks. * A daily close below 1740 would be my line in the sand for the S fund. *

The I fund has been consolidating for 4 weeks, not yet able to push through the 61.8% retracement level. It is possible that some of the overbought condition of the I fund is being worked off during this consolidation and another move higher is imminent. The I fund closed Friday just above its 20DM line.

The F fund is not looking good and could lead the stock funds lower. The stock funds and the F fund have been moving in tandem since January 2022. While there are scenarios going forward where stocks fall and the F fund rallies, there are no scenarios for the reverse. If the F fund is moving lower, it’s because rates are moving higher. This puts downward pressure on stocks.

Bottom Line

In the short term, I would like to see one more rally in the stock funds. In the long term, the rally that began at the October low is on borrowed time. As rates continue higher, pushing the F fund lower and putting pressure on the stock funds, the G fund return moves higher.

The next reallocation will be to the G fund. It’s just a matter of trying to squeeze out the remainder of this rally. If you are risk averse, there is nothing wrong with reallocating to the G fund at this point. If prices break down this week, you will certainly see an Alert…

Have a great week!

The Grow My TSP Team