Weekly TSP Newsletter: 27 November 2022

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It was a very productive holiday shortened week for all of the TSP funds! For the week the C fund finished up 1.53%, S fund up 1.39%, I fund up 2.26%, and F fund up 1.07%. The big question is, how much longer can this rally last? We’ll get to that by looking at both the daily and weekly charts.

In last weekend’s Newsletter we talked about Recession, the 10-2 Yield Curve and the Unemployment Rate. This week, I want to show a few more data points to broaden the perspective. History, they say, doesn’t repeat but it does rhyme. Recession is a term that defines the state of the economy. It’s certainly related but, recession does not define the direction of stock prices.

In the chart below we can see that the 10-2 yield curve is currently inverted. This is always a precursor to recession but, it’s when the curve un-inverts that the recession usually begins.

The weekly chart of the C fund shows price action during the 3 recessions since 2000. The 2001 recession didn’t begin until the bear market was already well underway. It also ended long before the final bottom. Within that recession there were 2 major bear market rallies.

The 2008 recession encompassed virtually the entire bear market and extended well into the recovery. There were several major bear market rallies during this recession.

The 2020 recession was lock-down induced and was extremely short. Having said that, the yield curve did invert in 2019. The economy was in trouble long before CoVid came along.

The key take-aways here are that stock prices always fall during recession but bear market rallies are very common. Stocks tend to fall before a recession begins and can continue to fall once a recession is over. The bottom of a bear market may or may not coincide with the end of a recession.

The current economic environment of high inflation is much more similar to the 1980s and early 1990s than 2000 or 2008. We had 2 recessions in the 1980s and the profile of the yield curve was much different than recessions in the 2000s.

This graph shows what the FED is trying to avoid this time around. By raising rates high enough to bring inflation down to 2%, the FED is trying to avoid this “double dip” recession we see in the 1980s. In the 2 cases in the 1980s, recession began while the yield curve was still inverted. This is an important observation! Many economists expect the yield curve to un-invert before a recession begins but, this is not always the case. The inversion of the yield curve today is not (yet) as deep as the 1980s but it’s much deeper than any of the 2000s recessions.

This chart shows the price action of the S&P500 during the 1980s and early 1990s recessions. In each case, the market bottomed long before the end of each recession. While it’s important to understand recession and it’s impact on stock prices, we should not use recession as a timing tool in terms of TSP account management.

The TSP Fund Charts

If you are following along with our Allocations, you have made some decent gains over the past couple of weeks in the I and F funds. The question is, how long can this rally continue? Some pundits have declared that the Bear Market ended at the October low. The majority, however, expect lower lows in 2023. In either case, using both the weekly and daily charts will help us navigate going forward.

The weekly chart is extremely valuable for several reasons. It helps us pull back and not get sucked into the day to day volatility of the market. It also shows us the long term trend and important inflection points. We can see that from May 2020 to January 2022, every time the C fund corrected it found support at the 20 Week Moving Average (WMA) line. As long as price is above that line, the long term trend is up. Once we got a weekly close below that line in January 2022, the 20WMA began acting as resistance.

A sustainable long term up trend cannot happen when price is below the 20WMA. Having said that, just because price closes above that line does not guarantee a sustained rally. We’ve seen this twice already in 2022. The C fund has closed above its 20WMA for the past 3 weeks and the line is beginning to curve up. This is a very bullish sign! With support at the 20WMA, RSI above 50 and MACD having crossed positive, we have a Buy signal for the C fund on a weekly basis.

While we got a buy signal on a weekly basis, the daily chart tells us something different. The price pattern coming off of the October low is not an impulse move. The pattern right now is an a-b-c corrective move. IF price accelerates to the upside and takes out the August highs, the game has changed. At that point, the odds of October being the low of this bear market improve dramatically. Unless/until this happens, we should look for weakness in this rally to lock in recent gains and prepare for the next leg down.

The weekly chart of the S fund is not as strong as the C fund. Price is consolidating right at the 20WMA. If price can close above the early November high, that would be a big step in the right direction. A close below 1600 is probably the end of this rally attempt.

Like the C fund, the price pattern of the S fund on a daily basis is corrective. We have not seen a strong impulse move off of the October lows. This chart does not inspire confidence that the S fund will take out its August high anytime soon.

The I fund is in rally mode! It gave us an explosive buy signal 2 weeks ago and followed through this week. As we’ve discussed numerous times, the rally in the I fund is fueled by the falling value of the U.S. Dollar over the past month. IF the dollar continues to fall, the I fund will continue to rally. This rally has very little to do with the fundamentals of companies that make up the I fund. It’s all about the dollar but, for our purposes, none of that matters. We need to respect the trend.

On a daily basis, the I fund looks very strong. This IS and example of an impulse move higher. Having said that, the I fund is certainly due for a breather in the short term. With RSI at overbought levels and the MACD histogram (blue) rolling over, I would expect a pull back over the next couple of weeks. A pull back to the 20EMA and 50RSI would be constructive. Below that would trigger a sell signal.

The F fund has been in rally mode since its October low but is now hitting resistance at its 20WMA, the June low, and 50RSI line. IF the stock market rolls over from here, the F fund will likely follow. IF the FED raises rates more than the expected 50 basis points in December, the F fund will certainly roll over.

On a daily basis, the F fund looks very strong. After gapping up through its 20EMA, price has taken out the October high and is hitting resistance at the June low. Price is extended almost 2% above its 20EMA. This is significant for the F fund. Since the F fund is so sensitive to interest rates, I would consider selling on any weakness prior to the FED announcement on 14 December.

Bottom Line

Don’t let recession talk derail your TSP account management. It’s important to understand recession and its impact on the market but, it’s a terrible timing tool. The traditional definition of a recession is 2 consecutive quarters of negative GDP growth. We had that in Q1 and 2 this year but a recession was not declared by the National Bureau of Economic Research (NBER). With Q3 positive and Q4 likely positive, a recession won’t come until 2023 if at all…

The weekly charts give a a great road map and the daily charts tell us when to actually make turns along the road. Keeping an eye on both can help us stay in the market during volatile days and get out when the trend has clearly changed.

I hope everyone had a very Happy Thanksgiving!

Jerry