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.
Stock Trader's Almanac : Q4 Rally of 3rd Year of Presidential Cycle
The Stock Trader's Almanac (STA) is an outstanding resource! The Almanac has been published annually for decades with supporting data going back to the early 1900s. At $219 per year, including the hard cover Almanac and website resources, it's a steal! As good as it is, the Stock Trader's Almanac is one type of historical financial analysis. The primary thesis of the STA is built on cyclical analysis of price patterns. Cyclical or Seasonal patterns can be observed under repeatable conditions which allows the STA to model out price patterns into the future. Like any statistical model projecting into the future, there are no guarantees. Mr. Market always has the final word but, models help us build guide rails and to know when the pattern is acting outside of the model.
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.
Elliott Wave Count : Wave 3 or C Progressing
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.
Elliott Wave analysis is a mainstay in the Technical Analysis world but, it is clearly not the only form of analysis. Is it possible that both the STA and current Elliott Wave count will be correct for the remainder of 2023? Yes, it's possible. The market could bottom in November and stage a recovery rally into the end of the year, not exceeding 4400. A daily close above 4400 would invalidate the current Elliott Wave count. So yes, we could see a Q4 rally that meets the criteria of both thesis. Our job is to watch price action and respond to what actually happens.
TSP Fund Charts
At this point, all three TSP stock funds are oversold in the short term and we should expect some kind of recovery rally in the coming days. In the C fund chart below, we see that price failed to find support at its lower channel line. A rally back up to that channel line and the 20DMA line is a real possibility. For a Q4 rally to happen, price must first get back above 4200 and then give us a buy trigger above the 20DMA line. We will get that buy trigger sometime in the next 2 weeks IF the STA model is going to play out for the remainder of 2023.
Since the top in July, the S fund has collapsed in a 5 wave decline and is now negative on a year to date basis. The good news is that once a bottom is in place, the S fund could rally significantly going into the end of the year. The rally should play out in an A-B-C correction to the 5 wave decline but, the rally could be significant on a percentage basis. With RSI below 30, a rally in the S fund could begin as early as Monday.
The I fund continues its slow roll over with consistent lower highs and lower lows. There is no clear short term Elliott Wave pattern and the next potential support level is approximately 65. For the I fund, it really depends on which way the dollar breaks.
The F fund COULD BE putting in a bottom here. A 5 wave pattern to the downside, that began at the F fund high in August 2020, could be complete. In support of this, we have divergence between price and RSI for the past several weeks. The 3 October bottom gave an extremely oversold RSI reading. The subsequent lower low in price gave us a much higher RSI reading. This divergence tells us that momentum us shifting from sellers to buyers. We also have MACD already turning positive. We are watching closely for a buy trigger in the F fund.
Bottom Line
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
