TSP Talk - Thrift Savings Plan Strategies

Volatility returns

After taking a couple of days off, the market's volatility returned as the Dow dropped 120 after a weak housing report, then slowly climbed its way back before the close. The S&P 500 actually ended the day in the green. With volatility comes emotion. How did you react?

With the Dow down over 100 I was tempted myself to add something to my 25% stock allocation. I still believe the short-term could be rocky but I want to use weakness to buy and strength to sell until things calm down.

That potential short-term weakness sure has me itching to move back to the sidelines. If you look at the chart below, there is a past pattern in the S&P 500 that may get your attention.

It might be tough to see, but the current weekly chart pattern (B) shows a long consistent move higher that ended with a steep decline and was followed by two weeks of sideways action, a lower low during the 3rd week, a push higher during the 4th, and so far more sideways action. Back in early 2004 that almost identical pattern played out (A) and it led to several more months of consolidation and lower lows.

Chart provided courtesy of www.decisionpoint.com

There is a difference however. Sentiment is much less bullish now than it was back in early 2004 giving the market a little more of a cushion. The more bullish people are, the more room there is to fall, so this less bullish sentiment may keep that 2004 pattern from repeating. Does that mean we won't test the prior lows made a few week ago? Not necessarily. But it does mean the pullback may end more quickly.

I expect the volatility to continue so again, I may "trade" more actively than you saw during the last half of 2006. I want to buy weakness, but also sell into strength until we see the technical picture improves and a better pattern develops.

Yesterday I mentioned that I may not stick with the F fund if the bond picture deteriorates. The AGG chart still looks OK but looking at the 30-year bond chart shows a head and shoulders pattern forming, which can be bearish if it plays out. Also, the PMO (Price Momentum Oscillator) recently moved under the 10-day moving averages which can be a bearish sign.

Chart provided courtesy of www.decisionpoint.com

The G fund payout is not as clear this week. I believe there is a 50/50 chance whether the penny will be paid Wednesday or Thursday. For that reason I will move out of the F fund this morning into the G for Wednesday, but I will see how stocks do early on this morning before I settle on a final allocation. I suspect I will either go to 75% G and 25% C, or just 100% G fund if stocks don't move down too much.

With the Fed facing a slowing economy but continued inflationary pressures, the interest rate picture, and hence, the stock market picture, remains fuzzy in the short-term. Add the fact that the TSP Talk Sentiment Survey System is in a sell signal this week, the last week in March is historically weak (see chart at the bottom of this page) and we haven't gotten a buy signal yet from Trader Fred, and I believe we should remain cautious to some extent. But we can use weakness to buy because I believe the lows made a few weeks ago may provide support on the downside.

See Trader Fred's current TSP Trader System comments on the system page.

That's all for today. I am currently 75% F, 25% C fund but there will be a change today. Watch for an email alert. See you tomorrow.