Weekly TSP Newsletter: 07 August 2022

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After last week’s HUGE move higher, the TSP funds finished mixed this week. The C fund ended up 0.36%, S fund up 2.35%, I fund down 1.08%, and F fund down 1.12%.

There is so much going on in the market that it’s hard to keep up much less form a cogent thesis as to where the market goes from here. If you believe the bottom is in and the market is going to new all time highs, you can find confirmation bias for that argument in the media. It’s the same if you believe the market will roll over any minute and head much lower. You can certainly find confirmation bias for that argument all over the media.

A better way to come to this is to look at similar patterns in the past BUT be open to different outcomes this time…

With that as the backdrop, this newsletter is going to compare the C fund during the 2008 bear market to the 2022 bear market. Specifically, we’re going to focus on the 2008 bear market rally and the current bear market rally. There are similarities and there are differences. At the end of the day, applying technical analysis tools enables us to manage very difficult markets much better than consulting a crystal ball.

The 2008 Bear Market

I’m choosing the 2008 bear market as a comparison to the current bear market because of the similarities to date. In the chart below, we see how the entire 2007-2009 bear market played out.

The first wave down was a 20% move. The second was a 50% recovery rally. From here, the market collapsed back to the 20% drawdown level, consolidated, and collapsed following the Lehman Brothers failure. This was the beginning of a much larger wave three down. Eventually, the market consolidated for a wave 4 and a final low at wave 5.

That’s the big picture of the 2007-2009 market and we know how that story ends. It’s pretty easy to pull it apart in hindsight. In the next chart, we look at wave 1 and 2 of the 2008 bear market on a day to day basis, just like we’re doing in today’s market.

The top of the market was 1577 in October of 2007. We got a clear 5 wave count to a low in mid-March 2008; a 20% drawdown from the 2007 high. Wave 2 brought price back up to the 50% retracement level and the resistance zone between 1400 and 1425. If we apply our current technical analysis methodology to this chart, nothing changes. We want to be in the C fund when price is above the 20DMA, RSI above 50, CCI above 0, and MACD positive.

In this case, wave 2 is very clearly a bear market rally. There are no impulse waves within this wave 2, and RSI and MACD began diverging with price in early to mid-May. Anyone who saw this set-up in 2008 made a fortune selling stocks short, even just back to the prior low at 1255. Once the 1255 level failed in September, short sellers really made a killing!

The 2022 Bear Market

We don’t have the luxury of beginning the 2022 Bear Market section with the benefit of hindsight. We don’t know how this story will play out. What we do know is that, if 2008 is a guide, we have a long way to go in terms of both price and time, until we see the bottom of this market.

The chart below shows the January 2022 top to present. Like the 2008 wave 1, the current market has played out in a 5 wave pattern ending in a 20% drawdown. We are currently forming wave 2 which should take price a bit higher before rolling over to begin wave 3 down.

Wave 1 from 2008 and 2022 are very similar; almost eerily similar. Wave 2 is a bit different. The current wave 2 looks more like an impulse wave that still has some room to the upside before completing. Once wave 2 completes, we need to watch the next down leg very carefully! Because wave 2 is an impulse wave, a correction SHOULD play out in an A-B-C pattern and NOT take out the lows from mid-June. If that happens, everything changes!! We will look at that possibility if it happens.

For now the assumption is that once wave 2 completes, the strongest down wave of the entire 2022 bear market should begin.

Bottom Line

Elliott Waves are not a crystal ball. The Elliott Wave Theory gives us guidelines and long term PROBABILITIES. The 2022 market is playing out in a very similar manner, though not the same, as the 2008 market. We need to watch the next few weeks/months very closely.

The highest probability is that wave 2 completes in the near future and a long, painful wave 3 down begins. This probability is confirmed if the S&P closes below the June low. The second probability is that the bear market ended at the June low. IF that is the case, what we are calling wave 2 will become wave 1 of a new long term rally, ultimately to new highs.

I have my opinion as to which of these probabilities is most likely but, the price action and the charts will ultimately tell us the answer…

We are in a very, very challenging market! We have to respond to the market, not to the prognostications of the pundits. At the end of the day, price is all that matters…

Have a great week!

Jerry