When your investment choices are index funds, then your analysis becomes more focused. The diversified indexes require analysis of diversified indicators. Fundamental analysis focuses on the supporting economy and aggregate corporate growth (or lack of). While fundamental analysis can not be used for timing, it can provide guide posts for expected long term returns and the level of risk one is assuming when fundamentals and price diverge. Technical and seasonal analysis are more suited to informing timing decisions. The one problem with technical analysis is that it uses trailing data and can be like driving a car by looking in the rear view mirror. As long as the curves are not too sharp it performs well.
But with broad index funds like the TSP funds, you can also focus your technical analysis on market internals. The nice thing about market internals is they sometimes lead the price, so you get a heads up and your signals are closer to the peak or trough. I posted an update for members on my website on 1 March that discussed divergence in market breadth indications and the market price. My view was the market was topping and we would see another correction commence this week. I have no downside prediction at this time, but technical support is found 4% below its high.
It is often said the volume leads price. Actually volume usually tracks price, but when it diverges you can expect price to follow. In the chart above we see three divergences between volume (green) and price (black) of the NYSE. Do not compare the level of the plots, but the direction. Volume gave us a heads up this time along with other breadth indicators. Since the S&P 500 was trading at the top of its recent price channel, it was not surprising.
If the bull market has strength, the S&P 500 (TSP C fund) may correct less than 4%. The TSP C and S fund trade in near lock step most of the time, so one will not correct without the other. They do move advance and decline at different rates. But the market has ample reason to correct more than 4% from a fundamental view point. Since the market does not trade on fundamentals in the short term, I will simply say there is more risk in the market today and your allocations should reflect this.
In my last post I mentioned that GDP was revised down in the 4th Quarter (July-Sept 2014) to 2.2% growth from 2.6%. The Federal Reserve Bank of Atlanta’s Center for Quantitative Economic Research developed a near real time GDP forecast model that updates constantly as data comes in. It eliminates some of the lag in economic reporting. Its forecast for the 1st Quarter GDP dropped from 2.2% mid-February to 1.2% by the end of February. Much of the drop is from the energy sector cutting back investment, but most sectors of the economy are seeing declines. In the chart below, the Blue area represents the ever optimist estimates of economist. The green line represents the actual data.
If the market internals change for the positive, I will let my members know once the data is confirmed. If you are not already a member, I would like to invite you to join my services. My goal is to provide information that allows you to make more informed decisions as well as timing signals. While my bull/bear indicator remains on bull, this bull market is weakening internally. Join for the signals, the information or just to donate to support my research in helping you to grow your TSP.
Michael H Bond