TSP Allocation Strategy

TSP Charts: Tug-a-war

The short term direction of the market (TSP C Fund) is in a tug-a-war at this point.  Our MACD indicator signaled a sell, but the market is bouncing off  its trend line established in early 2013 and only breached significantly once during the October correction.  We have already seen several sell-buy-sell signals this last couple of years.  This means after triggering a sell the market gives one last rally tipping back into a buy for a short period of time before commencing a deeper correction.  If you look at the end-of-year in 2013 we see an extended double sell signal interrupted by the Turn-of-Year rally (Santa Rally).  Could this happen again?  Possibly.  The chart below ends at the closing price of 10 December.

 

S&P 500 (TSP C Fund) Trend and MACD indicator

S&P 500 (TSP C Fund) Trend and MACD indicator

 

I do not have crystal ball as to the short term (next few days) action of the index.  I do know we are still in December’s seasonal weak days, but they are not so much weak as neutral – meaning there is a lack of seasonal support presently.  In the later half of the month that changes, but this does not guarantee gains.  Seasonal support means that if the market wants to trend down, it could merely pause and trade sideways until the support is no longer there before it continues its correction.  Last year we had a MACD sell, but the market bounced into the end of the year triggering a short buy signal, then traded sideways in January before correcting deeper back to the trend line.   I am hoping for a repeat of that bounce this month, but our concern is more with the new year.

We have previously mentioned the divergence between the small cap stocks and the large cap stocks.  In the chart below also see divergence between the New York Stock Exchange Index (Top) and its Advance-Decline Line (ADL) of the 2800 stocks making up the index (Bottom).  This means the breadth of the market during the last three rallies has weakened on each rally.  I see three possible scenarios:  The declining ADL turns up and we merely had a sideways correction in the market this year, a larger correction is in the works, or the bull market is exhausting itself.  Due to valuations far in excess of historical mean valuations, the instability developing in the global financial environment, and the central bankers’ Quantitative Easing showing diminishing returns I tend to expect one of the latter two outcomes next year.

 

NYSE ADL

 

One final note off the subject of charts.  I have been of the opinion QE was targeted more toward reflating the bubble in financial assets as well as bailing out the larger banks balance sheets.  One of the side effects of all this easy money was mal-investment in the form of unneeded building and production (a significant issue in China).  When productive capacity greatly exceeds demand you end up with deflationary forces in consumer goods, but at some point the building of additional capacity stops due to lack of demand.   Thus the need for commodities wanes significantly from the boom years during all the building.  Currently this is leading to a collapse in commodity prices and oil.  This is a major disruption to the global economy especially the export driven economies and emerging markets.  But a larger concern in our over-indebted world has to do with the considerable debt that can no longer be supported by companies and nations that depend on higher commodity prices.   It does appear the global debt bubble has been pierced and the central bankers are desperately trying to keep their bubble inflated.

2015 will be an interesting year.