It was a mixed week for the TSP. The C and S funds rallied but the I and F funds were off a bit. For the week the C fund finished up 1.94%, S fund up 2.57% I fund down 0.46%, and the F fund down 1.08%.
Stocks and bonds are in decline. The C fund has been in a down trend since early January 2022. The S and I funds both peaked in November of 2021, and the F fund peaked all the way back in August 2020! We talk about the market topping in January 2022 but the mean peak was really back in February 2021. Since then, fewer and fewer stocks in the S&P500 were holding up the average.
At this point, everyone is focused on one question, “Are we at the bottom?”. Unfortunately, there is no way to know the answer to that question other than in hindsight. There is no shortage of people who are willing to prognosticate. Everyone seems to have a crystal ball… From the research I’ve done, I have never found anyone who can accurately predict future market direction. So, if no one has a reliable crystal ball, what are we to do as TSP investors? The answer is simple but not easy.
In this newsletter, we’re going to breakdown the last 2 major stock market bottoms; 2003 and 2009. By the end of this newsletter, you will have the tools to navigate the eventual bottom of the current bear market, whenever it comes. The question is, are you willing to do the work and trust the tools…
The Anatomy of a Stock Market Bottom
The chart below shows the 2000 peak, 2003 bottom, 2007 peak, and the 2009 bottom. The 2000 to 2003 market decline and bottom look much different than the 2007 to 2009 market decline and bottom. In 2003, the market put in a long-term triple bottom pattern from mid-2002 to early 2003 before finally breaking to the upside. In 2009, the market put in a V bottom pattern, exploded higher and never looked back.
We can look at this long term chart in hindsight and see two clear down trends and one clear up trend. Everything becomes simple in hindsight! Unfortunately, we have to make reallocation decisions for our TSP in real time. So, how do we play these bottoms in real time?
Below is a one year daily chart of the C fund from June 2002 to June 2003. By the July 2002 low, the market had been declining for almost two and a half years and the C fund had lost about 50% of its value. There had been two tradable recovery rallies during the decline but, the market eventually rolled over to make new lows. There was absolutely no way to know that the July low was the beginning of a long term triple bottom pattern.
Using our current technical analysis stack of price, 20DMA, RSI, CCI, and MACD, we had 7 reallocation triggers during this one year period. There were four buy triggers (Green dotted lines) and three sell triggers (Red dotted lines). A buy trigger happens when price moves up and closes above its 20DMA, RSI crosses up above the 50 line, CCI crosses up above the 0 line, and MACD crosses up. A sell trigger is the opposite. It triggers when price moves down below its 20DMA, RSI crosses down below 50, CCI crosses down below the 0 line, and the MACD crosses down.
The first buy signal triggered in mid-August and was shortly followed by a sell signal in late August. Had we reallocated between the C and G funds in line with those buy/sell triggers, we would have ended flat. The second buy signal was in mid-October. This signal remained in place until early December. Had we followed these buy/sell signals, we would have been slightly positive over the two month time period. The third buy signal happened at the very end of December 2008 and only lasted about 2 weeks before rolling over. The fourth buy signal happened in mid-March 2003. This was the final bottom of the three year long Bear Market…
There is no way to know when the final bottom will be in place. The goal is to be on the right side of the trend IN REAL TIME. This is how you do it.
The 2009 bottom looks much different than the 2003 bottom but the exact same rules apply. In this case, we have two buy signals and one sell signal. The first buy signal came in late December 2008 and only lasted for a couple of days. The next buy signal came in mid-March 2009. While you wouldn’t have known it on the day of the buy trigger, this was the beginning of the longest Bull Market in stock market history…
The tools work but they take practice and patience. In general, you want to be in the stock funds when price is above its 20DMA and RSI is above 50. You want to be in the G fund when price is below the 20DMA and RSI is below 50. It’s NOT AN EXACT SCIENCE. There are occasional overshoots and headfakes. We can also apply other tools to further support the buy/sell signals. The point is, trying to anticipate a bottom, ie crystal ball, is not helpful. You have to work what the market gives you on a daily basis to be on the right side of the trend.
The TSP Fund Charts
In the 6 month daily charts below you can see where I have identified the buy/sell triggers over the past 6 months. Some of these triggers resulted in an Alert while others did not. We posted an Alert to reallocate into the stock funds in mid-March and a reallocation back into the G fund in mid-April. The late May buy trigger DID NOT result in an Alert. RSI was over 50 at the time but just barely. I wanted to see some positive follow through before posting an Alert. We did not get that follow through and the market eventually rolled over. As of Friday’s close, we technically have another buy trigger. RSI is just barely above 50 but, there is a ton of overhead resistance at 3900. IF the market gaps up next week, expect to see an Alert…
The chart below is also a 6 month daily chart of the C fund. Here we look at 2 different technical indicators, the % of stocks above the 20DMA (!GT20SPX) indicator and the VIX. We want the !GT20SPX indicator rising and above 60 to support a buy signal. We don’t have that as of Friday.
The VIX is a measure of fear in the market and has been trending higher, putting in higher lows, since late March. The VIX broke down through the trend line on Friday. This is a bullish indicator for the C fund.
So, while a buy signal has technically triggered, there is still a fair amount of conflicting information and serious resistance in the 3900 area. I’m confident that the market will resolve the conflict this week.
The current S fund set up is very similar to the C fund. There is a technical buy signal in place but it is very weak. I need to see more follow through before committing to a reallocation to the S fund.
A buy signal has not triggered on the I fund. Price is still below the 20DMA, RSI is below 50, CCI is below 0, and MACD has barely crossed positive. The I fund put in a new low on Tuesday and volume was decreasing as price was increasing later in the week. Not a bullish sign.
As we explained last week, a buy signal triggered on the F fund in late June. I wanted to see how the F fund would respond on a pull back to its 20DMA before reallocating. Unfortunately, the 20DMA did not act as support and we got a technical sell signal on Friday. If price can stay above 101 and rally this week, an Alert to the F fund in the near future is a definite possibility.
No one has a crystal ball and we don’t need one! If we use the tools and respond to what the market gives us, we can be on the right side of the market in real time. Will we catch the exact bottom? NO. Are we trying to “time the market”? NO.
By being on the right side of the market we will catch the vast majority of the gains and avoid the vast majority of the declines. If you’re looking for a “How To” book on managing market bottoms, this newsletter is it. – And the reverse is true for market tops…
If you have questions, please post them to comments or hit us up in the Members Only Facebook group or Support@GrowMyTSP.com.
Have a great week!