The C fund is down almost 5% in the past 2 weeks while the S fund is down about 5.5%. Is this a "buy the dip" opportunity OR are we in the early stages of a major market decline?
There are 2 competing theories for how the remainder of 2023 and the beginning of 2024 will play out. In the end, one will be right and the other will be wrong; probably. It will be very helpful to have a good understanding of each theory to help guide your reallocation decisions for the next several months.
We have discussed the chart below numerous times throughout 2023. The chart shows us the average price pattern of the S&P500, our C fund, in pre-election years going back to 1949. The top 2 lines are most relevant for TSP investors. They represent the price patterns during first term pre-election years, and pre-election years after a mid-term Bear Market. Both of those conditions have been met in 2023; President Biden's first term and a Bear Market in 2022.
So far, 2023 is generally following the pattern. We had a rally early in the year, a correction from February into early March, a rally through late July, and the current pull back. If the pattern continues, the current pull back should complete in November followed by a strong rally into the end of the year.
Cyclical/Seasonal analysis is well documented outside of STA. This type of analysis is used throughout the Technical Analysis industry. You could find dozens of analyst interviews on CNBC or Bloomberg referring to the seasonal pattern and an expected Q4 rally in 2023.
The beauty and frustration of any analytical discipline is that different models can be applied to the same data to get a different result.
The Elliott Wave Principle, by Alfred Frost and Robert Prechter, is a must have resource for any analyst of price movement. First published in 1978, Elliott Wave Principle details the discovery made by Ralph Nelson Elliott that social or crowd behavior trends and reverses in recognizable patterns. The buying and selling of stocks in a market is like putting crowd behavior under a microscope. The patterns that emerge are repeatable and allow us to utilize Elliott Waves to project price patterns into the future.
Much like the cyclical model from the STA, there is no guarantee that price will follow the Elliott Wave model into the future. Again, Mr. Market has the final word. The model gives us guide rails, enabling us to see when price patterns act outside of the model.
The chart below gives us the current Elliott Wave model as of Friday's closing price on the S&P500. As we discussed in the last 2 Alert Analysis, this count was my Alternate until a close below 4200. At that point, it became my Primary. The 4200 level was violated on Wednesday of this week and price continued lower into the week's close.
The top in January 2022 was a 5 of 5 of 5. Because Elliott Waves are fractal, patterns within patterns, the January 2022 top is extremely significant as a very long term top. We had a 5 wave move down to the October 2022 low to complete circle 1, followed by an A-B-C correction to complete circle 2 in late July 2023. Price is now in the early stages of wave circle 3 to the downside. The count will complete at circle 5 at prices well below the October 2022 low.
If you go "All In" on either the Stock Trader's Almanac thesis or the Elliott Wave thesis, you will likely either win big or lose big. You could go 50/50 and take watered down gains or watered down losses. The third option is to respond to what price actually does.
In the last Alert, the Grow Model Portfolio reallocated to 50% C / 50% G to account for both possibilities, with a line in the sand at 4200 on the S&P. The 4200 level was violated on Wednesday of this week, resulting in another reallocation to 100% G Fund. Below 4200, the downside risk outweighs upside potential gains. IF we get a buy trigger in November, be ready for a reallocation back into the stock funds.
Have a great week!
The Grow My TSP Team