TSP Weekly Newsletter: 23 April 2023

It was a relatively flat week for the stock market. In fact, volatility has been very low the first three weeks of April, with the C fund advancing only 0.59% in a narrow trading range. For the week the C fund was down 0.10%, S fund up 0.26%, I fund up 0.55%, and the F fund down 0.23%.

On the Podcast two weeks ago, we discussed trading strategies from Jeffery Hirsch at StockTradersAlmanac.com and Larry Williams at IReallyTrade.com. If you haven’t seen that Podcast, go back and watch it on YouTube. There is a ton of still timely info in there! In this Newsletter, we’re going to drill down into the “Best Months Seasonal Switching Strategy” from Stock Trader’s Almanac.

The strategy is very simple and has its origins in the Wall Street adage, “Sell in May and go away!”. For more on the history of this famous Wall Street lore, here’s a great article. The idea is that Wall Street traders go on vacation during the summer, resulting in light trading volume that creates a summer doldrums for stocks. While summer vacations aren’t what they used to be, the tendency persists.

This is a great strategy to follow if you don’t watch the market often. It’s a seasonal, historically validated strategy that consistently beats a “Buy & Hold” strategy over time. There are, however, some obvious downsides. It’s based on historical analysis, not what’s happening currently in the market!

The Strategy

On an historical basis, the best 6 months to be in the S&P500 are November through April. The worst 6 months are May through October. That’s the basis of the strategy. It is executed using a MACD cross and is confirmed by the Dow Jones Industrial Average.

The daily chart of the C fund below shows the past 7 buy/sell triggers for the strategy. Because November is the first of the best months, the first positive MACD cross after 01 October is the buy trigger. Because May is the first of the worst months, the first negative MACD cross after 01 April is the sell trigger. A sell trigger for the worst 6 months of 2023 is imminent…

The strategy begins with buy/sell triggers in the S&P500 (C fund). It is confirmed by the same trigger in the Dow Jones Industrial Average. The DJI chart below shows the same timeframe as above. Triggers tend to happen within a few days of the S&P500 triggers. Both need to be in place for a reallocation.

The easiest way to follow the strategy is to set up a split screen with the S&P500 on top and DJI below. We can see that the triggers tend to happen almost on the same day. This way, it’s easy to see that both the S&P500 and DJI are very close to giving us a sell trigger.

Stock Trader’s Almanac has done the historical math and here are the results:

“May officially marks the beginning of the “Worst Six Months” for the DJIA and S&P. To wit: “Sell in May and go away.” Our “Best Six Months Switching Strategy,” created in 1986, proves that there is merit to this old trader’s tale. A hypothetical $10,000 investment in the DJIA compounded to a gain of $1,132,837 for November-April in 72 years compared to just $3,422 for May-October (STA 2023, page 54). The same hypothetical $10,000 investment in the S&P 500 compounded to $906,861 for November-April in 72 years compared to a gain of just $14,918 for May-October.” – (04/20/2023 email to subscribers)

Bottom line, if you are looking for simple strategy that has you in the stock funds during the historically best performing months of the year, and out during the worst performing months, this is a very good one. Even if you don’t follow this strategy, StockTradersAlmanac.com is a Must Have resource!

The TSP Fund Charts

In the long term, we have 2 clear turning points in this chart; the August high and the October low. In the short term, we see higher highs and higher lows; a clear up trend. Price has yet to take out the February high and looks to be rolling over. A daily close below the 20DMA line and below 50RSI will be a sell trigger for the C fund. MACD is currently just barely positive and declining. This tells us that momentum is waning and to anticipate a sell signal.

The S fund is in the same long term range from the August 2022 high to the October low. In the short term, the S fund looks much weaker than the C fund with a potential “Head & Shoulders” pattern forming. If price loses support at the 20DMA line, the S fund is likely to begin the next leg lower.

The I fund is still the strongest chart of all the TSP funds. However, it too is showing signs of weakness with MACD about to cross negative. Following the next major correction for stocks, the I fund will be the fund to watch for leadership and out-performance.

The F fund put in a sell trigger last Friday. Price recovered some this week but was rejected at the 20DMA line. With RSI below 50 and declining and a negative MACD, the F fund is not a great option at this time.

Bottom Line

The stock funds have held up better than the F fund during the first 4 months of 2023 but they continue to trend in the same general direction. As we head into the summer doldrums, it will be very interesting to see if we get the long awaited collapse in stocks and explosive move higher in the F fund.

It’s going to be an exciting summer for the market, if you’re a technical analyst… If you know you won’t be watching the market closely this summer, or if you’re stressed out from the past 18 months of erratic market behavior, the “Best Months Seasonal Switching Strategy” might be a good option…

Have a great week!

The Grow My TSP Team


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