If you want to understand the market’s action in December and January you have to understand the interplay of the market’s seasonal tendencies, technical tendencies and the perceptions of the European Central Bank’s Quantitative Easing announcement. The classic Turn-of-Year rally ended early due to its encounter with technical resistance and the continuance of a market correction. The market correction loitered sideways in anticipation of the announcement of the ECB’s Quantitative Easing (QE) and its terms. The markets had two years and countless leaks to price in the announcement of QE. An invisible hand made sure the 22 January announcement was met with a strong positive reaction (to the upside) just as when the Federal Reserve announces a new policy that would otherwise be considered negative. Friday was the day after and although too early to come to conclusions, the lack of follow-through was worrisome to the bulls. The strong advance on the announcement was not met with increasing market breadth and we are left with a very neutral market action.
With the long term trend broken in the TSP C fund, we appear to be in a transition in the market. The charts themselves will tell us whether the rally will continue at a slower pace or a topping process has begun. Current market action can be described as neutral. The price action as represented by the charts paint the picture of the collective decisions of the market participates and at each new market high and low we look at the market internals and breadth to give us a hint of the future direction of the market. Investor preferences for risk show in other indicators that may can signal a transition from buy-on-dips to sell-on-strength by the smart money. Today we will simply focus on recent market action as evidenced by the charts.
The European court gave the go ahead for the ECB Quantitative Easing on 13 January and on the 15th the Swiss National Bank shocked the markets by releasing its peg to the Euro. The TSP I fund jumped on the 15th relative to the US equity funds. While the fund outperformed for several days, it has given back much of its relative gains over the TSP C and S fund the last few trading days. The effect on the TSP F fund will be felt indirectly through its effect on US interest rates going forward and the global move to safe haven assets. If you eliminate the single day jump in the TSP I fund on the 15th, the I fund gained very little relative strength over US equities. QE will not commence until March, so market action is hard to predict in the interim. How much has already been priced in matters. In this respect, the picture is mixed and the charts will be telling over the next month. We will discuss our predictions for the year ahead in another post.
Our Expedient Timing Model moved out of the TSP S fund at the close of 23 December and reduced exposure further to the TSP C fund on 22 January. We have shifted to a sell-on-strength mode until stability returns to the market and the direction is confirmed going forward. With the backdrop of high valuations, widening credit spreads, and lack of market breadth in market rallies we remain cautious. Our almanacs combined with technical analysis helped us in our timing and will inform our future decisions. We have added a TSP F fund almanac and a combined TSP C/S/F fund almanac to our website for members and note that a mere 1% improvement in performance of a 20K portfolio will more than pay for our full membership. A half a percent improvement will cover our basic timing alert service. Invest smart.