It was a pretty volatile but mixed week for the TSP. For the week the C fund finished down 0.20%, S fund down 0.59%, I fund up 0.73%, and the F fund down 1.38%. Importantly, Friday began the Santa Clause Rally time period that runs through January 4th. If you are not familiar with the Santa Clause Rally, we do a deep dive in the TSP Weekly Podcast this weekend. Definitely check it out!
We’re going to use the first part of the Newsletter to breakdown the first 7 minutes of this video from Wealthion. The interview is between Stephanie Pomboy and David Rosenberg. It’s a 2 part series that is definitely worth watching but, the first 7 minutes of the second segment is critically important to understand.
Rosenberg makes two important points. The first is that the bottom of the stock market comes when the 10 year – 2 year treasury spread un-inverts and hits about 1.4. We’ve shown the chart below several times with respect to recession. When the line is below 0, the yield curve is inverted. Yield must un-invert and hit approximately positive 1.4 before we will see the bottom in the stock market. In 2003 and 2009, the yield curve turned positive and hit 2.0 before the final bottom was in. The CoVid bear market happened so fast that the curve only rose to about 0.5 at the March 2020 low. The bottom line is that the yield curve must turn positive in a meaningful way before we will see a bottom in the current bear market.
His second point is Equity Risk Premium. Stocks are much more risky than bonds. The equity risk premium is the amount of return investors need to accept the risk of stocks over bonds. If bond yields (returns) are low, investors will choose stocks to get a better return. If bond yields are high, investors will choose the safety of bonds for a guaranteed rate of return with low risk.
Right now, long dated treasury bond yields are relatively high at 4% with basically 0 risk. With stock prices volatile and falling, investors are clearly choosing the safety of bonds over stocks. This is why our F fund has been rising since the October low. For investors to move from bonds to stocks, the yield on bonds must come way down, decreasing the guaranteed return on bonds and making stocks more attractive.
Here’s the important piece for us as TSP investors. When bond yields go down, the price of the bond goes up. This means that, before investors pile back into stocks, the price of bonds will have gone through the roof! This is the set-up for our F fund to explode to the upside BEFORE stock prices begin moving higher.
Here’s the bottom line. We need to watch the F fund VERY closely. It will likely explode to the upside several months before the stock market bottoms. IF this plays out, expect the F fund to rally very strongly in the first half of 2023 and the stock funds to rally strongly in the second half. So, how will we know when to pull the trigger on the F fund?
In this scenario, the F fund COULD rally all the way back up to the 113 area by the middle of 2023 (while stock funds are falling).
Assuming the above scenario, the F fund is in a short term correction. We want to see price find support at one of the Fibonacci levels and explode to the upside. Our initial buy trigger will be price back above the 20DMA line, RSI above 50, CCI above 0, and MACD crossing positive. The final confirmation would be a daily close above the December intra day high at 100.19.
* IF price closes below the October low at 93.18, the pattern has failed. NOT THE THESIS. We could see a double bottom or some other bottoming pattern process. *
As we all know, there are no guarantees in this business… Having said that, the next Alert is most likely to be 100% F fund sometime in early 2023.
The TSP Fund Charts
The C fund is consolidating after collapsing through the 20DMA off of its recent high. The next significant move is likely down from here. Having said that, the Santa Clause Rally (SCR) time period began on Friday with a great start; up 0.59%. IF the SCR continues, we could see the C fund rally back up to resistance at the 20DMA line or the 3900 level before the down trend resumes. Even with the SCR, there is very limited upside potential for the stock funds at this point.
The S fund is trying to find support at 1560. Price has found support at this level several times in 2022. If this support level fails, a third test of the 1500 level is next.
The I fund is consolidating just below its 20DMA. While the I fund is holding up better than the C or S funds, for the rally in the I fund, the cost of the U.S. Dollar will need to continue to decline. With the technical indicators rolling over, particularly divergence between price and RSI, we should expect the next leg down in the I fund to begin soon.
We covered the F fund fully above. In the short term, price has consolidated below the 20DMA and technical indicators are headed lower. In the short term, price is likely to move lower from here.
This newsletter is unusual in that we are forecasting what we expect to happen in 2023. This is the base case. It does not change how we evaluate the market on a day to day or trend basis. If the base case plays out, we are prepared to take full advantage. If it does not, we will respond to what the market gives us.
It’s going to be an extremely exciting year! Actually, a better description is a gut wrenching, emotional roller coaster… Stay engaged, have your lines in the sand, and keep your emotions in check! 2023 will likely be a very good year for capable, active TSP investors.
Happy Holidays To All!
The Grow My TSP Team