It was a relatively uneventful summer week for the TSP funds until Friday morning… On the first Friday of each month, at 8:30AM, the Bureau of Labor and Statistics releases the Employment Situation Summary, AKA, the Jobs Report. This month’s Jobs Report blew away expectations. This is great news for the economy! 943,000 jobs were added, beating the 845,000 expected. Additionally, the unemployment rate fell from 5.7% to 5.4%. One report does not make a trend but, these are huge numbers!

The downside to such a great report is the expected FED reaction to an improving economy. The FED has been dumping money into the economy, through various means, since before the 2009 bottom. The entire financial system is on the edge of its collective seat in anticipation of when the easy money will dry up. A report like this COULD be the catalyst for the FED to begin the tightening process. FED tightening will result in a rise in interest rates, which is what we saw on Friday.

When interest rates rise, the price of bonds goes down. The TSP F fund tracks the Aggregate Bond Index (AGG), which gets clobbered when interest rates move higher. That’s what happened on Friday. The F fund gapped down at the open and finished the day down 0.45%. That’s a HUGE move for the F fund as we’ll see in the charts below.

For the week, all three TSP stock funds finished in the green. The F fund gapped down thru its 10DMA on erased two weeks worth of gains. We haven’t seen a drop like that in the F fund since the early days of the CoVid crash… The C fund finished up 0.94%, S fund up 0.79%, I fund up 1.03%, and F fund down 0.43%.

A Probable Road Map

The stock funds have been in rally mode since the 2009 low, and more importantly, since the CoVid low in March 2020. The CoVid low was the last major bottom. We have been tracking the Elliott Wave Pattern and Fibonacci extension targets as they have emerged.

Below is what I am using as my current road map, or target for the next several months. We expect that price will play out in 5 waves. We are currently somewhere in wave 3. Wave 3 could be topping or continue to extend. At some point, the wave 4 correction will begin. Wave 4 is likely to be a pretty significant correction, lasting several weeks. After wave 4 is complete, we should get a final wave 5 that takes us to our second Fibonacci target of 5345.

This chart represents generally how I EXPECT the price of the C fund to unfold. I DO NOT have a crystal ball and many unforeseen circumstances could arise to derail this analysis. Having said that, it gives us a way to set up our lines in the sand when making TSP reallocation decisions.

The TSP Fund Charts

The C fund has been mostly running above it’s 10DMA for the past year. Since the low in Nov 2020, each time the C fund broke down thru the 10DMA it found support at the 50DMA. There is no great way to anticipate the wave 3 top. As long as price remains above the 50DMA, wave 3 has not yet completed. We are watching for a downward curve of the 10DMA as a first indicator. A cross of the 10DMA down thru the 50DMA would be the start of wave 4.

The S fund has been in a sideways consolidation for the past six months. Horizontal consolidations USUALLY resolve in the direction of the prior trend, up in this case. We need to see price clear the channel, on the upside or downside, to know we are out of this consolidation. This week’s support at the 10DMA and 50DMA is a bullish sign but, we will see how increasing interest rates effects the S fund…

The I fund just completed a short A-B-C correction and is now back above its 10DMA and 50DMA. With this week’s cross of the 10DMA up thru the 50DMA, the I fund is in good shape.

For the reasons we described above, the F fund could be at the end of its rally that began at the March 2021 low. From the low in March to the August high, the F fund rallied almost 4%. That’s a very big move over 5 months! We can see that Friday’s gap down thru the 10DMA was significant. It’s possible that we get support at the 50DMA. Much of this will depend on statements that will be made by the FED in the coming days. The only bright side of the chart below is that the last 3 days of selling on the F fund came on very low volume.

* There is one other possibility for the F fund. Depending on how this week plays out, we will discuss in next weekend’s Weekly Update Newsletter *

Bottom Line

IF we have seen the beginning of a FED tightening cycle, the F fund will continue to decline in price. The C and I funds will likely out perform the S fund because interest rate increases create more of a drag on growth companies than value companies. Any actual tightening could be the catalyst that brings wave 3 to an end and sets the stage for a wave 4 correction. We could be in for a rocky fall… Having said that, I don’t think we see the final high of the 5th wave until sometime next year.

Have a great week!

Jerry