This is how we ended last week’s Newsletter. It was some good advice for this week…
“Either way, volatility will only increase from here. These extreme Bear Market Rallies are not going away! Try to stay focused on the indicators and price action. Don’t worry about the day to day movements, no matter the direction or the dollar amount. It’s a great time to be watching this from the sidelines of the G fund!”
We certainly did get plenty of volatility this week! By the end the C fund was down 1.55%, S fund down 2.78%, I fund down 1.44%, and F fund down 1.16%.
The C fund is down 25% year to date; S and I funds are worse. If you or your co-workers are still in the stock funds, you DEFINITELY want to watch the Weekly Update Show this Sunday night. We do a deep dive into “Is it too late to move to the G fund”. Don’t miss it!
Many of the macro-economists and money managers that I follow agree that the next bull market will be in hard assets and long term treasury bonds. Without getting into the fundamental of the thesis, let’s look at the charts and see if this concept has played out in the past. Because we have no way to invest in hard assets in the core TSP funds, we will focus on our ability to invest in long term treasury bonds.
The F fund, ticker symbol AGG, tracks the U.S. Aggregate Bond Index. The chart below lists the top holdings in the AGG. We can see that over 40% of the index is comprised of U.S. Treasury Bonds. Another 25% include Fannie Mae, Ginnie Mae, and Freddie Mac. The remainder is comprised of Corporate Bonds. With over 40% of the AGG comprised of U.S. Treasury Bonds, the AGG is the only fund we have in core TSP to take advantage of long term treasury bonds.
The next three charts compare the S&P500 (C fund) with the iShares 20+ year Treasury Bond ETF. This is the same as the Vanguard LT Government Bond Index Fund, ticker symbol VLGSX. The VLGSX can be purchased in the Mutual Fund Window.
In the monthly chart below, going back to 2002, we see that the S&P500 and the TLT were both in an overall up trend from 2002 to the early 2020s. Since the S&P500 top in January, both have trended lower in tandem. What is extremely important is to drill down and look at what USUALLY happens at significant market turns. We can see that, in EVERY instance of stock market correction, TLT exploded higher; until 2022.
The macro-economic thesis is that the FED will continue to raise rates until something “breaks” in the economy. This break will cause a complete collapse in stocks and an explosion higher in the TLT.
The TLT was rising from the low in 2007 into mid-2008. When the stock market collapsed in October 2008, the TLT really exploded to the upside! We saw this to a lesser degree in 2010 and 2011. Once stocks found a bottom and began moving higher, the TLT rolled over.
The TLT was correcting as the S&P500 was rising into 2020. Once the Covid crash began, the TLT exploded to the upside. As often happens, the TLT was actually leading indicator. Once the S&P500 stabilized and began to move higher, the TLT rolled over.
What we have NEVER seen, since at least back to 2002, is the S&P500 and the TLT moving lower in tandem. This is what we have since the beginning of 2022. The thesis holds that, at some point, stocks will fall drastically and the TLT will again explode to the upside.
How do we use this information? IF the thesis is correct, we want to reallocate to the F fund and/or the VLGSX in the Mutual Fund Window, on a significant stock market collapse. This is a “flight to safety”. Investors flee from a falling market into the relative safety of long term treasury bonds. HUGE gains can be made in the F fund and VLGSX during this type of collapse. However, once the stock market bottoms, we do not want to stay in bond funds. Once a bottom in stocks is confirmed, we want to reallocate back to the stock funds for the next Bull Market!
We want to keep a VERY close eye on the chart of the TLT!
The TSP Fund Charts
It was an extremely volatile end to the week! Thursday’s gap down at the open pierced the 3500 level before recovering for a greater than 2.5% gain. The rally continued on Friday morning, right up to the 20DMA line and then reversed for a 2.37% decline on the day. This is NOT a market that we can play in as TSP investors. That doesn’t mean we throw in the towel and wait for a market bottom. It means we get extremely vigilant! At some point a tradable bottom will be in place. We will know that when the indicators line up and we must be ready to get back into the stock funds.
The S fund chart is similar with price piercing support at 1500 briefly on Thursday. We have a pretty clear head & shoulders pattern on the S fund, with a neckline at 1500. A close below this level is a very bad sign.
The I fund is outside of its declining channel as price accelerates to the downside. There is no reason to believe that the I fund will mount a serious recovery rally in the near term.
The F fund is at fresh new lows with no evidence in the chart of a recovery in the near term. The F fund put in a low at 98 in June. The September rally tested the 98 level and was rejected. Price needs to get back above that 98 level before any significant rally can take hold.
The Bear Market continues in both stocks and bonds. There is nowhere to hide other than the G fund, which is increasing in value by the week. IF we do get a full collapse in the stock market, bonds (our F fund) SHOULD explode to the upside. That is what history suggests but, 2022 has defied all history.
We need to watch very carefully and respond to what the market gives us…
Have a great week!