Perspectives

TSP Investing Today: Return of Capital Trumps Return on Capital

TSP C Fund Chart

TSP C Fund Breaks Trend and Establishes Lower Low

I want to advise my readers upfront that it is much better to leave some profits on the table than to lose your shirt with one more bet.   This may seem like strange advice as we enter the TSP Smart Investor strategy’s window for re-entering equities.  We strongly believe in our strategy and believe it beats any other strategy over the full market cycle, but market tops and bottoms are like Tsunamis compared to the seasonal tides.  We look to our Bull/Bear indicator and others to adjust our exposure to stocks during these reversals.  Our models will give you straight unemotional signals and go 100% in or out of the market and have shown to be smarter than subjective decision-making, but a special study of tops and bottoms is a must and I will write about these in coming weeks.

Our very slow bull/bear indicator remains in a bull market, but may test the cross over line in the coming months. It is inching that way now as the latest correction penetrated the uptrend firmly established since early 2013.  Markets rarely just crash (decline greater than 20%), so we do believe we will see another rally that will probably trigger a late buy signal on our models.  We, of course, would like to see a larger correction here prior to re-entering.   Once our models re-enter, much of our discussion will be on determining if the bull market is forming a top and how to manage it.  If it is a top, it will finish forming over the strong season in equities and will end lower than the entry point.  We call this a seasonal reversal and it occurred the last two tops in 2000 and 2007.  The follow-on weak seasons trigger the largest losses.

We are on a solid sell signal on all the models as we approach the investment windows, so our indicators will not generate a buy signal until the trend is established up again.  Members who study our Almanacs will see the last big down trading day in October over the last 60 year and since 2000.  Even if that day is extremely negative; buying the close on this trading day has been profitable in the past.  Our model can trigger sooner based on the trend of the market and that is the signal we will post for members.

14 Oct 2014 SP500

Short Term trend line penetrated (green) with Seasonal Low trend line (red) requiring a 18% correction to hit

But today let’s look at the TSP C Fund’s proxy, the S&P500 index. The index does not include dividends and provides a more pure technical picture.  The green line is the short term trend line.  Not only did the trend break down, but a lower low was established.  The S&P500 (C Fund) has been the strongest index compared to both international indexes and the small and mid-cap funds such as the TSP S Fund and the Russell 2000.  The question has been lately would the other indexes catch up with the S&P 500 or would the S&P 500 index finally break down and follow the other indexes.  It now appears the S&P 500 has some catching up to do…on the downside.  A correction like the one seen in 2011 would take the S&P 500 down to 1650 range which also lines up the seasonal low trend line seen in 2010, 2011 and 2012 but missed in 2013–not a predication, but an observation.

Tread carefully — the trend is no longer with us and we are in the weakest of the weak season for equities.