A monster rally this week was kicked off by a much better than expected CPI number on Tuesday morning. Inflation is coming down and the market is betting on rate cuts from the FED! For the week the C fund was up 2.24%, S fund up 4.57%, I fund up 3.98%, and F fund up 1.37%.

Immaculate Disinflation

Consumer Price Index (CPI) and Producer Price Index (PPI) both came in much lower than expected on Tuesday. These are the among the most watched inflation data points for the FED. Inflation is coming down; that’s disinflation. It does not mean that prices in the stores are coming down. In fact, prices are still going up, just not as fast as they were this time last year.

Immaculate Disinflation, coined by a Bloomberg guest, is the corner stone of the Soft Landing / No Recession scenario. As inflation decreases and unemployment stays low, the FED is clear to begin a rate easing cycle. This is great for both stocks and bonds! In the short term this is the narrative so let’s enjoy it while it lasts…

Santa Clause Meets Goldilocks

It’s Santa Clause Rally Season, along with a Goldilocks economy (inflation down & unemployment low). With the economy apparently firing on all cylinders, the Santa Clause Rally has a lot of potential this year. Assuming we are on track for a year end rally, what’s the best way to play it?

Small cap stocks (S fund) tends to outperform large cap stocks (C fund) from roughly November through February. The chart below is courtesy of Jeff Hirsch at Almanac Trader.

The Russell 3000 is one of the broadest indexes tracked in the U.S. Within is the Russell 2000, a benchmark index for small to midsize companies, and the Russell 1000, large cap companies within the Russell 3000. This chart is showing the ratio between the Russell 2000 and Russell 1000, or Small Cap vs Large Cap.

The yellow line is the ratio since July 2023. The line is declining as large cap stocks have outperformed small caps over that time period. The historical line shows that the tide is about to shift with small caps outperforming large caps from mid-November through February.

How can we apply the ratio of the Russell indexes to TSP? The C fund is a large cap index. The S fund is a small to mid-cap index. The ratio of C vs S is similar to R2 vs R1.

The weekly chart below shows the ratio of C vs S going back to 2016. While the S fund does not out perform the C fund every year from November through February, there is something to this. In each year in this chart, the S fund begins to outperform the C fund late in the year or early the following year. Where the outperformance begins tends to vary a bit but, outperformance consistently ends in February.

If the current rally continues, increasing the % holdings in the S fund could result in better performance than a combination of C, S, and I.



There are no guarantees but, is it probable that this rally continues into 2024? Absolutely, yes. Virtually every tailwind is in place to push stocks higher over the next couple of months. Of course, price will not go up in a straight line. What does history say will be the path?

The chart below comes from Tom McClellan at mcoscillator.com. The blue line is the average seasonal pattern going back to 1997, excluding 2020 as Covid would have severely skewed the average. We can see that 2023 is following the pattern relatively closely. We certainly had a divergence from the middle of October to the beginning of November! That “Ooops” in the chart was painful… Actual price going down as the historical pattern was going up.. Now it appears price is back on track for a year end rally.

If we look closely, there is definitely some churn in mid-November. Thanksgiving Week tends to be choppy to down so, don’t get too concerned if we see a pull back over the next 2 weeks. We should also expect a pull back in mid-December before a final run into the end of the year.

The next 6-7 weeks should be pretty strong. Beyond that is anyone’s guess. The opposite of the Wall Street consensus might be the best guess…

TSP Fund Charts

Analysis is a tricky thing. There’s the very clear trend but, if you look closely, you can pull out nuance.

The C fund put in a bottom in price in early October at the 30 RSI line. It then rallied to just above 50 RSI before falling to new lows at the end of October and 30 RSI again. What’s the difference in the current rally? RSI is now overbought at 70. The buyers, green ADX line, are piling in. CCI is well above 100 and MACD looks great. What’s giving us pause is the red ADX line. The sellers are not leaving the market . The sellers have not thrown in the towel. This could be short sellers still holding their position or a general lack of confidence in this rally. For now, the trend is sellers leaving the market. Ideally that holds. If that red seller line gets above 20 its a big red flag.



The S fund chart shows the ADX buyer line close to a peak at 40 and sellers declining but not below 20. RSI still has room to move higher before becoming overbought and MACD looks great. Wednesday’s reversal was a concern but price held up Thursday and Friday. The S fund could very well outperform the C fund for the next couple of months but, there will always be reasons to be watchful.



The I fund chart looks very similar to the C fund. RS is hitting overbought at 70. ADX buyers line is getting extended to the upside but, CCI and MACD look great. Ideally we see the ADX seller line continue to decline below 20.



The F fund is really interesting and consistent with the narrative. There is plenty of room for the ADX buyer line to move higher along with RSI. CCI and MACD both look great. The concern is the flat ADX seller line. While price is trending higher, sellers are not leaving. We want to see that red line trending down. This will tell us there is confidence in this rally.

Bottom Line

There is every reason to expect this rally to continue through the end of the year. Inflation is coming down, the FED is apparently finished hiking rates, the dollar is falling, yields are falling, and the seasonal charts give us an all clear. Every tailwind for stocks is in place, and that’s what should worry you…

The market “never” does what the consensus expects. Maybe this time will be different but, the consensus absolutely expects a year end rally. Just don’t get complacent. 2024 is looming and the macroeconomic problems have not gone away.

Have a great week

The Grow My TSP Team