TSP Weekly Newsletter: 26 March 2023

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A strong reversal on Friday is keeping this rally alive in the face of an ongoing banking crisis and deteriorating economic conditions. For the week the C fund finished up 1.39%, S fund up 0.52%, I fund up 2.45%, and the F fund up 0.63%.

A very interesting observation was made on Bloomberg this week. It seems that investors acknowledge that a recession is a foregone conclusion and the current banking crisis is likely to pull the timing of the recession forward. The idea is that investors have “priced in” that inevitable recession and are now allocating capital based on a post recession recovery.

The problem, from our perspective, is that the recession has not happened yet; neither an earnings recession nor an economic recession. Perhaps this is simply Bloomberg’s justification for the rally’s continuation in the face of declining fundamentals. Perhaps it’s true. If so, we need to see some follow through. Price action since the October low, so far, has been corrective; implying that the next significant direction is down.

Interest Rates

The following two charts show the history of the 10 year bond yield back to the establishment of the current Federal Reserve Bank in 1913. Stocks tend to be weaker during periods of increasing interest rates and stronger during periods of decreasing rates. The long term Bull Market in stocks than began in 1982 coincided with the long term top in interest rates in 1982.

The chart below shows the nominal 10 year bond yield. It put in an initial low in 1940 at about 2%. Yield began to rise over the next 40 years and topped out at about 16% in 1982. From 1982 to 2020, yield fell to a low of about 0.5%. A 40 year run up to a top followed by a 40 year decline to a bottom.

In 2020, the FED began to raise rates and yield began to increase. Yield has risen from the 0.5% low to the current rate of about 3.5%. We can see clearly in the chart that the long term down trendline has been broken.

A lot has been made of the fact that yield has only risen about 3%. It’s not that much. Yields are still very low from a historical perspective. On a nominal basis, this is absolutely true. However, when we look at this chart on a logarithmic basis, the picture is MUCH different.

The chart below is the same as the chart above but in a logarithmic rather than nominal scale. The logarithmic scale gives us the % change rather than the number change. Why is this important? Here’s an example…

Let’s say you have $1,000 to invest. If you buy 10 shares of a stock for $100 per share and it goes up $50, you just made a 50% gain. If you bought 1,000 shares of a stock for $1 per share and it goes up $0.50, you just made a 50% gain. The dollar value of the move does not matter. What matters is the % move of the stock.

In this chart of yield, the 2 red lines are the same length. On a logarithmic chart, that means each line represents the same % move. From the low in 1940 to the high in 1982 took about 40 years for yield to rise that %. From the low in 2020 to the high in 2022, yield made the same % move higher. The MAGNITUDE of rate increase that we have seen in the past 2 years took 40 years in the last cycle.

This is an absolutely unprecedented increase in yield over such a short period of time. We don’t see anything like this going back to the founding of the Federal Reserve in 1913. This explosive increase of rates is just beginning to have an effect in the banking sector and will playout throughout the economy in the years ahead. It is this explosive increase in rates that economists believe will cause the upcoming serious recession.

We always hear about how the FED Chairman Paul Volker killed inflation by raising rates to extreme highs in the late 1970s and early 1980s. While this is certainly true on a nominal basis, current FED Chairman Powell has already raised rates more than double Volker on a % basis.

We are in uncharted waters. This is probably the most important long term chart we can watch…

In the short term, the Elliott Wave count suggests that rates will move even higher. From the 2020 low to the 2022 high, yield has played out in three major waves with wave IV in progress. Ideally, wave IV will complete in the vicinity of the prior wave 4 (about 2.6%). If yield gets below the 2023 lows at 3.4%, we could see them fall to 2.6%. (The FED Pivot?) Once wave IV is complete, wave V should take out the 2022 highs in yield at wave III.

The TSP Fund Charts

The weekly chart of the C fund goes back to the Covid lows. We have the 20WMA line in blue, the 50WMA in green, and the 200WMA in purple. While the past two weeks have been positive, price looks to be hitting a wall of resistance on a weekly basis. IF price rolls over, the most important line to watch is the 200WMA. This has acted as long term support going back to the 2009 lows! A weekly close below the 200WMA at 3736 would be EXTREMELY bearish.

On a daily chart, C fund price action is pretty weak. Friday’s bullish reversal gave the market some hope, closing above its 20DMA line. Unfortunately, the technical indicators are not supporting a breakout. RSI is right on the 50 line and rising, CCI is below 0 and declining, and MACD is flat. There is no momentum behind the move off of the March lows yet.

The S fund looks much weaker than the C fund. Price put in a new intra-day low on Friday, RSI is below 50 and declining, CCI below 0 and declining, and MACD is firming up but yet to cross positive. Things could change next week but, this chart does not look good.

The I fund hit resistance this week at its 20DMA line. RSI is below 50 and flat, CCI below 0 and declining, and MACD is flat. Again, there is no momentum behind the rally off of the March lows, yet.

The F fund looks much stronger than any of the stock funds at this point. We identified a buy trigger back in early March and the F fund has rallied since. We posted a Market Update on 23 March that focused heavily on the F fund and why we have not yet allocated to it. If you have not watched that Market Update, please go to the Dashboard or the app and watch it. Start at the 7min 15sec mark for the F fund analysis.

The F fund is likely to be extremely important for the remainder of the year. We are working of a very focused F fund product that will post by the end of the week. It will be a document that you will want to keep for reference for the foreseeable future.

The daily F fund chart below gives us a nice buy trigger in early March. Unfortunately, it is in the midst of one of the worst possible patterns; the expanding triangle. We have higher highs and lower lows to make an expanding triangle. It’s very difficult to identify actual breakouts from this pattern, which makes is so frustrating. In the short term, a measured move analysis takes price to the upper trendline at 103. This would be a great short term target for the F fund. That’s about 3% higher than Friday’s close. The question is, is that potential 3% worth the risk?..

Bottom Line

This is probably a good time to step back and remember that TSP is a long-term retirement vehicle. It is NOT a day trading platform. Rule #1 is Don’t Lose Money. Rule # 2 is your account grows in the stock funds when the market is trending up.

We are in the midst of an historic interest rate shock, the effects of which are just beginning to be felt in the economy. From a long-term perspective, now is the time to focus on preservation of wealth (ie Don’t lose money). We will certainly have occasional rallies from over-sold conditions. Some of them may be opportunities to lock in some short term gains. However, the long-term perspective right now should be on risk management and wealth preservation.

Have a great week!

The Grow My TSP Team