TSP Charts: Divergence

By Michael Bond on December 9, 2014

The small and mid-capitalized stocks represented by the TSP S fund have lead the large capitalized stocks of the TSP C fund (S&P 500) in both the rallies and declines over the summer. The S fund topped sooner, rolled over faster and deeper while the C fund extended its top sideways before correcting. On 5 December our MACD indicator for S fund provided a sell signal as the fund appears to be forming a top. But the C fund has not provided a sell signal…yet, but I think most of the rally’s gains are behind us with one exception. Note: I use a faster indicator for small caps than large caps, the slower indicator was close but not yet tripped on the S fund as of the close of 8 Dec.

TSP S fund leads timing in rallies and declines

TSP S Fund Sell Signal

If you trade, it would appear to be time to sell equity funds. But then we are approaching the end-of-year and if history repeats the last half of December will see a short rally. We are currently in December’s weak timeframe when tax-loss selling typically occurs so declines in the market are expected. I have looked back at the recent charts and not found a December quite like this one where the market is at the beginning of a correction while closing in on the end-of-year rally. But even during some of the past weaker market action, the market still found a way to be up or even for the rally this time of year.

Unless the central banks throw more desperate measures at the markets in the interim, I expect the beginning of the new year will not be good to the markets. The correction will resume in earnest as it pauses for the end-of-year rally. I would even go on to say that investors should not become complacent with one more rally and wait and see what the new year brings. Lower your exposure to stocks no later than the first trading day of January next year especially the small caps (TSP S Fund). The much written about January effect merely states that the small cap stocks relative performance in January has been slightly better than large caps. I do not find the overall performance of the large or small caps in January anything better than neutral on average since 2000.

What are the positives that are supporting the TSP C fund (S&P 500) over other the indexes? In a warped way, the piercing of the global credit bubble with the makings of the next financial crisis benefit the US markets as I outlined in my recent post The Smart Bird – Fissures in the Global Investing Environment. Speculative money is fleeing the rest-of-the-world and flowing to the US markets due to perceptions of a long-rally in the US dollar, a stronger economy, and highly unstable conditions elsewhere. The initial smart money play in the US is to move to defensive stocks in the S&P 500 and the safer US bond, then if the situation appears more unstable smart money will move to cash. But, of course, the Fed and other central bankers will try to keep their bubble inflated possibly extending the US market – at least sideways for awhile.

I employ a seasonal filters in determine when to enter and exit the stock market each year. In the long run the strategy blows away the indexes partly because 75% of the bear market losses in the past have occurred during the summer/fall timeframe when our strategy is out of the market. Surprisingly, even during bear markets the strategy performs well by being in the market during the strong period and capturing bear market rallies. But I am into risk mitigation especially in this age of uncharted global monetary policy. So I created an additional model that takes into consideration other factors in order to reduce exposure to stocks even during the strong period for equities. My straight models (Advantage) are either 100% in or 100% out of their respective funds.

You can follow my new model by signing up for e-mail alerts using my lowest cost timing service and see how I navigate the following year. Otherwise, trade carefully over the coming year in both your TSP and other accounts. There is a reason most retail investors have their highest market exposure at market tops and lowest at market bottoms. That is how Wall Street and the smart money wants it.