TSP Charts

TSP Charts: Summer Doldrums

Shortly after the end of the favorable season’s sell signals came in, I started enjoying the summer on the road with my family.  I kept checking the market and news, but nothing significant was developing.  Without the Fed’s QE it looks like this year’s weak season will be…well, weak.  Even record stock buyback announcements have not propelled the markets higher.  Technically, it is still Spring but since I was a kid I have always felt like Summer starts when school is out.

By the way, the antidotal explanation for the “Sell in May” effect is that the senior partners of many investing firms leave the junior partners in charge as they head out for their summer holidays and the real investing does not occur until they return in the Fall.  Regardless of the reason, the effect has been observed for over three hundred years in England’s stock market and over one hundred years in the US markets.   The effect creates the makings of the best risk-adjusted strategy for index funds, but I digress. Let’s start with a long term chart of the S&P 500.

S&P 500

S&P 500

In late 2014, the S&P 500 broke its bull market trend line due to slowing momentum.  The dotted lines provide the S&P 500’s recent price channel and this price channel remains intact.  A closer look below shows us the more recent action.

S&P 500

S&P 500

The recent price action has been weaker.  The late May top did not reach the upper trend lines as seen in the circle.  Also note that three times the market has bottomed at 2080.   The wild swings of 2014 and early 2015 have been replaced with a sideways action as seen by the market lows moving closer to the bottom of the price channel (black arrow).  How has the rest of the US stock market fared?

VXF ETF (TSP S Fund)

VXF ETF (TSP S Fund)

The mid-cap stocks as represented by the VXF ETF (TSP S fund) moved from the top of their long term price channel to the lower part of the price channel in 2014.  It has since been climbing the lower price channel or trend line ever since and broke to new highs early this year.   But since March it has been trading sideways returning to the lower price channel. Its long term trend remains intact for now.    We can see the small cap performance by observing the Russell 2000 index in the chart below.

Russell 2000

Russell 2000

The small caps traded sideways in 2014 breaking their trend in October 2014, but then broke to the upside in early 2015.  The trend line appeared to have become overhead resistance and now small caps also appears to be trading in a sideways pattern.

The summer months can have strong rallies but one has to ask what could propel stocks to significant new highs this summer.  Stocks are over-valued by historical standards and a decelerating economy does not support these valuations.  The Fed wants to tighten monetary policy, retail investors are “all in”, and many of the large banks are warning of liquidity issues in the bond market (meaning no one to buy once the selling starts).   And then there is the fear of contagion in the bond markets if Greece defaults on its debt (and they will).  So that leaves us with the only game in town, the belief that the central banks including the Federal Reserve can and will backstop the market if necessary.  Of course, this is how we got to this point in the first place.

I see no compelling reason to be in equities or bonds this summer.  Contrary to mainstream financial literature, market risk is not static and most retail investors do not even consider it.  As conditions change, market risk varies and under today’s conditions market risk is elevated and future expected returns are low.  This is true of stocks and bonds, so a diversified allocation does not change the equation.  I will address this in a future post in more detail.   For TSP investors I recommend joining us in the G fund for now and watching the circling black swans from the sidelines and more importantly enjoying your summer.