TSP Talk - Thrift Savings Plan Strategies

Strong December meets troubled lofty market

We had a mixed bag again yesterday as the smaller cap stocks fared much better than the larger stocks of the Dow and S&P 500.

The recent rally was as good or better than the prior sell off was bad. At market extremes the indicators tell you what to do but emotions can pull you in the other direction. The market has consolidated most of the year but like 2004, during the second half of the year the lows have been higher and the highs have been higher. That of course makes a positive trend. But just when it feels like the market will never go down (or up), it does.

Chart provided courtesy of www.decisionpoint.com

I don't want to make the same mistake I made in October. At point "A" (Oct 10) the indicators were telling me it was time to take a chance so I put money into the stock funds after being 100% G since September 6. It seemed to pay off right away as I almost picked the exact bottom. Because I was afraid of a test of that recent low, I jumped back out of stocks in a "panic" on October 28 (point B) when the market started to fall again. I quickly realized the mistake and waited for a little pullback to jump into stocks. As you can see after point B there was no real pullback to speak of so I sat on the sidelines like a deer caught in the headlights waiting.

Now the market is on the other end of that trading range. I look at point "C" as an inverse of point "A". Make no mistake, that is a healthy chart. The market just needs a rest. But a pullback has started and the indicators are waving a yellow flag.

If the market were to turn right back up at this point it would be an interesting situation. It would be almost the opposite of what happened in late October. In other words a big up day could cause us to "panic" buy in an attempt not to miss another move higher. But it would be going against the indicators. That would create a point "D" if it happened. Another point I could regret.

December is upon us and like November, it is historically a very strong month. In the 53 years from 1950 to 2002 December's average return was 1.80%. Tops on the monthly chart.

Charts provided courtesy of www.sentimentrader.com

December was also up 77% of the time during that period. Of course that means it was down 23% of the time. That's just over 3 to 1 in favor of a positive month. Will this month go with the odds or will it be the one in four that is down?

Jason Goepfert at Sentimentrader.com talked about another "market crash" signal he has read about called the Titanic Syndrome. It is similar to the Hindenburg Omen signal we talked about, and was triggered, in September. That signal did come before some real weakness in the market in September and October (40 point drop in the S&P 500) but it certainly wasn't a "crash."

This new signal has not actually triggered yet but it is very close. In a nutshell, the Titanic Syndrome, originated 40 years ago by a man named Bill Omaha, triggers when the Dow Jones Industrial Average hits a new high for the year (or rallies 400 points), but new lows on the NYSE outnumber new highs within 7 days of that high in the Dow.

Jason at Sentimentrader.com did some research looking for any time the Dow hit a new 52-week high, and yet new lows outnumbered new highs anytime within 7 days (before or after) the Dow hit that high.

"Since 1965, there have been 37 non-overlapping occurrences. Just like the Hindenburg Omen, it was a relatively successful early-warning sign of short- to intermediate-term weakness in equities. Buying the S&P 500 at the close when the signal registered and holding for 30 days, one would have had 11 winning trades (for an average of +3.0%) but 26 losing trades (for an average of -4.4%).

"During the 30-day holding period, the average maximum gain one would have enjoyed from the entry date was +2.3% while the average maximum drawdown (i.e. loss) was more than twice that, at -5.8%. Only two signals lead to a maximum gain of greater than 5%, while a whopping 19 of them lead to a maximum drawdown of more than -5%." - Jason Goepfert

Something to keep in the back of your mind.

I have taken some flack for my return this year and I make no excuses. I saw one guy write in a blog, "Clearly, this guy is a danger not only to himself, but to anyone who subscribes to his alert service." Ouch. Hey, it's been a rough few weeks for sure but I wouldn't go that far. He admitted he came across the site while looking for advice on how to allocate is account. My guess is he looked at the recent return rather than the information given here and in the message board over the past couple of years.

As always, make of this site what you will. You can follow my moves and be at the mercy of my timing. You can use the buy and hold suggested allocations I post. You can follow the account transactions posted in the message boards by some of our 1300+ board members. Or you can read the market comments and/or the message board and try to determine what would be best for you and your situation. My goal would be for everyone to take in and learn what makes the market tick and to be able to come away with a confidence to allow you to manage your own account. That would be a way for me to measure the success of this site. But I understand not everyone wants to take the time to do that, so I also realize that my return is the other measure of success for the site. Like the market, my success rate will fluctuate up and down. It's part of the challenge which I enjoy so much.

That's all for today. Currently 100% G fund. Thanks for reading. See you tomorrow.