It was a very big week for the TSP stock funds. The S fund led the stock funds higher with a gain of 4.39%, C fund up 1.52%, I fund up 1.57%, and F fund down 0.05%. We saw some important underlying movement in the market this week that was extremely bullish… The big question is, how will this new found strength compete with the severe seasonal headwinds?
In this newsletter we’re going to look the Silver Cross Index (SCI) and a Multi-Cycle chart of the S&P500 that has gone relatively viral this week. The take-aways from each of these give us opposing views of the near term direction of the market. As always, we will take in all the data THEN respond to what the market actually does…
We have been discussing and utilizing the Silver Cross Index (SCI) for the past several months. The SCI index shows us the trend of companies that make up the S&P500, whose 20DMA is above/below its 50DMA.
The chart below shows the S&P500 (C fund) price and the SCI index below. As you can see, there is not a great correlation between the price chart and the SCI trend. This has been my issue with really getting onboard and using SCI as an analysis tool. Price continued higher even as the SCI trended lower multiple times over the past 18 months.
The answer lies in a deeper dive into the SCI index… Last week we looked at the Equal Weighted S&P500. The S&P500 index is a Cap Weighted index, meaning the more dominant companies make up a larger percentage of the index. In the Equally Weighted S&P index, all companies make up an equal percentage of the index. What does this have to do with the SCI index? The SCI index shows us the trend of the number of companies whose 20DMA is above/below the 50DMA. The SCI has nothing to do with the market cap of each company. Take a look at the chart of the EW S&P500 and SCI index below.
The SCI correlates much more strongly with the EW S&P500 index. This gives us a great indication of where the overall market is likely headed over the next several months. It also shows us what has been happening behind the scenes of the S&P500 index from May thru July. While price of the S&P500 index has been moving steadily higher, the majority of the underlying companies have been consolidating. The big cap companies have been carrying the overall S&P500 index higher. Now the smaller companies within the index are beginning to turn higher as well.
We see the same type of pattern emerging in the S fund. We had the initial run up off the CoVid low, a consolidation, another run up into 2121, and a multi-month consolidation. The next move should be higher and COULD have begun this week…
We see the same pattern in the I fund. Initial run up, consolidation, longer run up, and consolidation. Ideally, the I fund will go along with any new run up in the EW S&P index and the S fund.
Everything above is the good news… Based on this analysis, all three TSP stock funds SHOULD move higher over the next several months. This is also consistent with the Elliott Wave analysis we’ve been discussing for the past several weeks/months. The analysis points to a POSSIBLE completion of a wave 4 consolidation and the beginning of a wave 5 higher in the TSP stock funds. And now for the bad news…
S&P500 Cycle Composite
We did a long discussion on this chart in the Weekly Update Show this weekend. You definitely want to check it out!
The chart below went a bit viral in the financial geek world this week. The chart was created by Ned Davis Research. The blue line is an equally weighted compilation of the one year seasonal cycle, four year Presidential cycle, and the 10-year Decennial cycle. The data range includes 1928 thru 2020. The trend of this line is much more important than the actual level.
The orange dotted line is the S&P500 (C Fund) from the beginning of 2021 to present. The S&P500 index has been tracking pretty closely with the Cycle Composite for 2021. Based on this chart, we would expect to see the beginning of a significant correction literally any day now…
Essentially, we have two opposing crystal balls here. This is not unusual but, in the end, one will be correct and the other will be wrong.
The analysis of the EW S&P500 index, S fund and I fund, calls for a new rally that may have begun this week. It’s a compelling argument given that all 3 appear to be breaking out of wave 4 sideways consolidation patterns.
The S&P500 Composite Cycle chart is also very compelling. It compiles data going all the way back to 1928! Given that the S&P500 index has closely tracked the Composite Cycle for all of 2021, we must be open to the possibility that this trend will continue; ie.. the stock funds will correct in September/October.
So where does that leave us? At Grow My TSP, we DO NOT operate off of a Crystal Ball. We respond to what the market tells us. We are currently fully invested in the TSP stock funds because the analysis of price action tells us to be in the stock funds. Until things change, we will hold the current allocations. IF you are risk averse, going on vacation, etc.. protecting the gains we’ve made over the last few months is not a bad idea, given the analysis of the Composite Cycle chart. IF you are more aggressive, maintaining 100% stock funds could result in a nice gain based on the SCI and price chart analysis.
September begins this Wednesday so, there are 2 trading days remaining in August. IF the market collapses early this week, expect to see an ALERT. If not, we will hold the course into September. It’s going to be a very interesting Fall for the stock market. Don’t get complacent!
Have a great week!