It was a very tough week for the stock funds. As bad as the numbers look this week, the charts are setting us up for much more pain… For the week the C fund was down 4.04%, S fund down 2.75%, I fund down 3.06% and F fund down 0.37%.
Seasonality in Context
In last week’s Newsletter we compared the year 2 Decennial Cycle chart to the current C fund chart. 2022 looks to be following the average pattern pretty well. However, if we step back and look at the 2 year within the larger context of the 10 year cycle, our interpretation of the 2022 price action changes significantly.
The chart below is the 10 year cycle chart of the Dow Jones Industrial Average (DJIA) going back to 1897. The DJIA is not the same as the S&P500 but, the average price action over time is close enough for our purposes. We can see that the major correction phase in the 10 year cycle comes from the middle of year 9 through the middle of year 2. That’s 3 years of correction on average ending in year 2.
The current bull market ended in January 2022 rather than mid-2019. If that’s the case, does it make sense to push the average corrective timeline forward 3 years? If we make that assumption then we still have a long way to go in terms of time for this correction cycle.
The rally that begins in Q4 of the year 2 cycle (on average) is a result of the prior 3 year correction and bottoming process. We are only 8 moths into the current correction cycle. From this broader perspective, the June low seems less likely to be the bottom of the current correction cycle. It’s also much less likely that a Q4 rally in 2022 would be the beginning of another major bull market.
We showed the charts below last week. While the C fund fell sharply this week, it is still possible this week’s price decline is in line with the average late August dip or just the beginning of the September correction. A close below the June low confirms that the Bear Market is still underway…
In the short term, it appears that this week’s price action is consistent with the broader 10 year cycle view. For the average year 2 on the Decennial Cycle to play out, we would need to see a 5 wave impulse move followed by a 3 wave correction into late September. This is what we discussed as the Bullish scenario in last weekend’s Newsletter and Monday’s Alert. Based on Friday’s price action, it does not look like we will get that 5 wave impulse move off of the June low. We would expect a wave 4 low to find support at the 50RSI and 0 CCI. We are definitely past that as of Friday’s close.
The TSP Charts
The C fund reversed at the down trend line last week and collapsed to the 20DMA. Friday’s huge move lower pretty much takes out the bullish scenario. Price closed significantly below the 20DMA and way outside the lower bounds of the Andrew’s Pitchfork. The final confirmation will be a close below the June low; about 11% down from here… If you’re still in the stock funds, now is your last best chance to protect the gains you’ve made since the June low before the next wave down really gets going.
The S fund is in the same boat as the C fund though the chart doesn’t look as severe. The S fund attempted to find support at the 20DMA line but failed on Friday. A close below the June low is a final confirmation that the next leg down for the S fund is underway. It’s a 14% move down from Friday’s closing price to the June low at 1500. I would not want to absorb that loss just to wait for confirmation.
The I fund chart is clearly leading us lower. After collapsing through its 20DMA line last week, price recovered and reversed at the 20DMA line. Friday’s collapse engulfed the entire week to the downside. Very bearish price action.
The F fund lost support at the 20DMA line last week and made very little improvement this week. With RSI well below 50, I would not be comfortable in the F fund at this point. CCI and MACD are trying to turn back up so, this is definitely something to watch. There is a strong argument to be made that, if the stock funds completely collapse, the F fun could move significantly higher.
It looks like the market is finally starting to believe what the FED has been telling us for the past several months. The FED has been extremely vocal about its commitment to continue raising rates to combat inflation. The rally since June was based on the belief that the FED would need to pause, or begin lowering rates relatively soon. The FED Chairman’s short speech at Jackson Hole on Friday finally convinced the market that he means business; and the market responded…
From a technical perspective, all eyes are now on the June low. Could we see a double bottom or some kind of bottoming process that keeps the June low in tact? It’s possible. The June low is now a major line in the sand and the entire market is watching that line.
It’s a good time to be in the G fund to watch this play out from the sidelines…
Have a great week!