It was a very rocky week for the TSP stock funds. The only silver lining is that the C fund found support at its 50 Day Moving Average (DMA) line and then recovered most of the weekly losses. The S and I funds did not fare nearly as well… For the week, the C fund was down 0.59%, S fund down 2.28%, I fund down 2.42%, and the F fund was up 0.16%.

At this point in the market cycle, it’s all about Risk Management. We never want to lose money but, we accept the daily ups and downs of the market. Risk Management is taking active steps to avoid the BIG losses. The Alert that posted last Monday morning laid out the 4 reasons why reallocating out of the stock funds made sense. The first two reasons, the intra-day breakdown in the S fund and the seasonal headwinds, were risk management. The second two were tactical. The F fund was looking very attractive and we still have additional IFTs for the month if necessary.

Why is Risk Management so important right now? We’re going to take a look at my only 2 possible Elliott Wave counts for the C fund. Both are telling us that a correction is on the horizon. The only difference between the two is the depth of the correction. We go into these 2 possibilities in great detail in the Weekly Update Show this weekend. You definitely want to check it out.

We’ll also look at a chart of the Equal Weighted S&P500. This chart shows the S&P500 if all companies in the index were evenly weighted. The actual S&P500 (C fund) is cap weighted. The top 5 companies make up 25% of the index! The chart of the Equal Weighted S&P500 gives us a better view of all the smaller companies in the index collectively.

Finally, we’ll look at the 8 Month Daily charts of the 4 core TSP funds.

2 Long Term Possibilities

The 14 year monthly chart of the C fund below shows my primary Elliott Wave count. 2009 was the last primary low. Since 2009, the C fund has progressed higher in 5 waves thru the top in early 2020. IF this count is correct and the early 2020 high was the end of wave I, then the CoVid crash was wave II. If this count is correct, we are now in a long term wave III that will take the market higher for the next several years. Again, IF this count is correct, the next correction/consolidation should be relatively mild and set us up for continued new highs.

The second possibility is that the top in 2020 was the wave III high. If you google “long term elliott wave count”, this is the count that most analysts expect. IF this count is correct then, the CoVid crash was wave IV and we are currently in wave V. IF this count is correct, the next major correction should take the price down to the area of the IV wave (approximately 2250). Again, this is what the majority of Elliott Wave analysts expect over the next few years.

Both of these possibilities call for a correction in the near future. The severity of the correction will tell us which Elliott Wave count was correct. Unfortunately, we will only know the answer in hindsight. For our purposes as TSP investors, what’s important is to understand that a correction is coming. Regardless of how deep or shallow the correction is, we want to apply good risk management techniques, reallocate to the G fund, and sit out the correction.

Equal Weight S&P500

While the long term chart gives us the possibility of a serious correction, we also have to keep a close eye on the short term charts to take the gains in the stock funds when we can get them. The Equal Weighted S&P500 chart below is pretty bullish right now. The index hit resistance at 6200 in early May and consolidated thru late July. The index finally broke out in early August and tested that 6200 level (now support) this week. IF the 6200 support level holds, price will move higher. If this support level fails, and we get a weekly close below 5900, then the correction will have begun. We DO NOT want to see a weekly close below 6200!

The Daily TSP Charts

On a daily basis, the C fund corrected down to its 50DMA and found support. We have seen this pattern throughout 2021. Each time the C fund has corrected, it has found support at its 50DMA and continued to new highs. As long as the C fund remains above its 50DMA, the market as a whole is in an up trend. When the C fund closes below its 50DMA and puts in a lower high, the trend will have changed. That will be our first MAJOR red flag.

The S fund recovered some of its weekly losses on Friday. It was certainly due for an up day following 2 weeks of serious declines. We can see in the chart that each low is higher than the previous low. This is a bullish long-term pattern unless/until price closes lower than the previous low. We currently have a lower high, with the August high lower than the June high. This is not a great sign but, the consecutive higher lows carries more weight at this point. The pattern is still bullish until proven otherwise.

The I fund put in a double top last week. Like the S fund, Friday’s recovery was to be expected following a week of consistent declines. The I fund finished the week below both its 10DMA and its 50DMA. This is definitely not a good sign. A close below the July low would be a serious problem for the I fund.

The F fund is in great shape. After finding support at its 50DMA, price has retaken the 10DMA and continues higher. A close above the August high of 116.75 would be extremely bullish for the F fund.

Bottom Line

Risk Management is always at the front of our minds but, now more than ever! We know a correction is coming. The question is how deep the correction will be. We don’t have a great way to time the correction so, we use tools like the Equal Weighted S&P chart, Elliott Wave count, Fibonacci retracement and extension levels, and technical indicators, to help us identify a trend change as early as possible.

August, September and October are historically the most volatile months of the year. With seasonal headwinds, a CoVid resurgence, inflation fears, and Consumer Sentiment at extreme lows, the next several months could be very challenging…

Have a great week!

Jerry