The first chart compares the performance of the three equity funds since the March 2014 peak. The TSP C fund’s rise has been steady, but recently it has lost momentum. The TSP S fund traded sideways for an extended period of time, but has made up ground on the C fund recently in a steep price channel. With the launching of the ECB’s QE, the TSP I fund has also turned up, but is still well below its June 2014 peak. The dollar’s surge has taken a toll on the I fund. If the dollar stabilizes, the I fund can again capture all its underlying securities gains.
The recent price action of the TSP S fund compelled me to take another look at its trend. The last year’s sideway price action appears to have taken the fund to its lower side of its price channel. The middle trend line appears to provide upside resistance at this time. I have also added the green lines to show the weak season for equities loses and the red line to show 2013’s weak season’s gain. 2013 was an exceptional year and the Fed’s QE probably provided a strong tail wind along with corporate stock buybacks. With the wind down of QE and now the prospect of tighter monetary policy, the tail wind has shifted to a head wind.
The current short term technical picture for the S&P 500 was mixed. Volume was slightly down while the price was slightly up on Friday. The last market bottom occurred at the 100 day simple moving average and we find ourselves back to this average. Prior to the last bottom, it was the 108 day simple moving average that provided a good bottom indication and that level currently sits at 2051 or half a percent below Friday’s closing price.
April is one of the stronger months of the year for equities and the last trading day of May typically has seasonal support. The last five year’s data shows a tighter window for April’s strength and I may look to capture this strength with our Expedient Timing Model if the technical picture supports it. Then I will follow our optimized timing signals to exist equities for what appears to be an interesting weak season in equities.
One note on monetary policy and the stock market. Historically, bear markets have not been halted by loosening monetary policy. Even when the Fed started aggressively cutting interest rates prior to market peaks, the markets still completed their cycle with a bear market. Even if the Fed reversed course and attempted to loosen monetary policy (from a zero interest rate stance today?), history shows this would have no effect in stopping a bear market contrary to the general impression of just about everyone. This is not to imply we are entering a bear market, but to simply state the focus on the Federal Reserve’s policy has limits.
The last two market tops proceeded recessions when the markets were significantly overvalued. History also shows the bear markets with the greatest losses were the ones were the market tops were most overvalued. Overvaluation is not a requisite for bear markets, but when markets have been valued at or below their mean valuation levels the bear markets have been milder.
Today, the markets are significantly above their mean valuations implying that the next bear market will again be severe. I have renamed the Strategic Report the Bull Bear Report because that is really what the study of cyclical indicators is all about – determining when a market correction is actually the beginning of a new bear market so we can sell on strength and not buy on the dips.
I have also been very interested in determining the effect of corporate buybacks on stock prices in general and the seasonal tendencies of those buybacks. Goldman Sacs suggested the current stock market weakness was due to a blackout season for buybacks prior to the April earnings announcements. Not that I do not trust Goldman Sacs (I don’t), but I decided to take a look the price action of stocks during the earnings season in the last seven years with the highest buyback ratio from a seasonal perspective. Goldman’s suggestion did not hold up, but I did find some interesting trends and provided a first look guide available to all members. All levels of TSP Smart Investor members can log on to review the Stock Buyback Seasonal Guide.
Categories: TSP Charts