We just completed the worst September for stocks since 2008 says Market Watch. For the month of September, the C fund finished lower by 9.32%, S fund down 10.05%, I fund down 9.24%, and F fund down 4.13%. For the final week of the 3rd quarter, the C fund finished down 2.91%, S fund down 1.12%, I fund down 1.34%, and F fund down 0.87%. As of today’s close, all 4 of the core TSP funds have taken out their June lows…

Seasonality

We’ve talked about Seasonality numerous times throughout the year. During years ending in 2 in any give decade (on average) price follows the path of the chart below. This chart was created by Larry Williams at StockCharts.com. He is an expert in seasonality trading and absolutely worth following.

The average year 2 in a decade has a challenging first half of the year, bottoms out in the summer, rallies into September, has a sizable correction, and then an explosive 4th quarter. We’ve shown this several times in Weekly Update Shows and Newsletters over the past several months. The pattern has been playing out so far in 2022. Why does it appear that the remainder of 2022 will not follow the pattern?

Stockcharts.com

For the answer to that question, we need to step back and put the year 2 into the broader context of the Decennial Cycle. Below is the Dow Jones 10 Year Cycle going all the way back to 1897. If we pull out the year 2 in the 10 year cycle, we can see that it generally matches the chart above. That makes sense but, where does this average year 2 come from and what does it set up for year 3 and beyond?

The 10 Year Cycle Chart shows us that the bottom in the summer of year 2 is actually the bottom of a 3 year correction; from mid 09 to mid 02. That explosive rally in the 4th quarter of years ending in 2 is the beginning of the biggest rally of each decade (on average). This is why context is so important. What does all this mean for us?

The best way to understand the 10 Year Cycle is to start at the top of the mid-09 year. This is the top for the decade and the beginning of a 3 year correction phase. How do we apply this to 2022?

https://www.seasonax.com/research/dow-jones-10-year-cycle

Below is a 20 year chart of the Dow Jones. From 2002 to 2007, the market followed the average very closely. The divergence with the average came in late 2007 as price continued significantly lower into 2008 and early 2009. Now, rather than 2009 being a top for the decade, it is clearly a low. This completely throws off the seasonal pattern going forward.

The pattern is still out of wack! Where years ending in 2 are, on average, lows for the decade, 2022 is a major cyclical high. This is why the 4th quarter of 2022 is unlikely to follow the average pattern and why I do not use seasonality projections to make reallocation decisions.

One final point about this chart. Look at that set-up on the VIX and the rounding long-term topping price pattern. The only time we have seen that kind of set-up in the past 20 years was right before the waterfall collapse of prices in 2008. Not a prediction, merely an observation but, if you are in the stock funds right now, you are playing a very dangerous game…

The TSP Charts

The 1 year daily chart of the C fund shows no sign of a recovery anytime soon. The weekly close below the June low and below the psychological 3600 level implies that price will continue lower from here. Having said that, in the near term, the C fund is very oversold. CCI is moving higher and MACD is stabilizing. I would not be surprised if we got a short recovery rally next week but, I would be very suspect of any rally at this point.

The S fund chart is slightly better than the C fund technically. The S fund closed the week right at its June low with RSI, CCI and MACD trying to move higher. We could see a rally next week, possibly up to resistance at the 1650 level at most. Again, any rally is very suspect until proved otherwise.

The I fund is in really bad shape but, the technical indicators are trying to turn higher. A rally next week could take price up to fill the gap and tag the 20DMA. Above that, there is serious resistance at the 60 level.

The F fund is really the chart to watch. If the dollar continues to decline, the F fund is our best chance for gains over the next several months.

Bottom Line

The macro-economic conditions are bad and deteriorating by the day. There is no reason to believe that the end of this Bear Market is in sight any time soon. Having said that, the market is clearly oversold in the short term. I would not be surprised to see a rally in the near future but, I would use any rally to decrease stock fund exposure if you still have any.

IF we are going to get an absolute collapse like 2008, it will be coming soon…

Stay alert and have a great week!

Jerry