Thrift Savings Plan Talk

The strength in oil stocks is not a good sign for broader market.

The weakness yesterday really didn't do much damage from a technical standpoint. The S&P 500 actually made a higher high and a higher lower, meaning the uptrend is intact. Things are still looking a little frothy to me and how the market handles a little pullback could set the stage for either another quick buying opportunity, or an extended leg down. I think we could get our answer in the next week or two.

The last several days in July tend to be better than average but historically August and September are tough to get through without some damage being done.

Chart provided courtesy of www.sentimentrader.com

On to oil. In the past 22 years, there have been four other times when the six-month return in the Oil Index has outdone the Bank Index by 20% or more for at least 30 consecutive days, as we see today. If history repeats itself then we should see some stress on the broader market. Let’s briefly discuss those four occurrences.

The first time this disparity between Oils and Banks hit such a long streak was August 11, 1987. The streak hit 30 days just as the broader market was topping out. It jerked around for a couple of weeks, but then began the slide that would eventually turn into the October crash.

The next occurrence was on January 11, 1990. The S&P 500 had already topped out but it continued to decline quite stiffly for the rest of the month, and then didn’t really go much of anywhere until it bottomed in late April.

Next we come to a time later that same year, August 30, 1990. This was only a bit after Saddam Hussein had invaded Kuwait and the U.S. moved troops into Saudi Arabia. The S&P declined for the rest of the month before experiencing some wild volatility – and eventually a bottom – in October.

The last occurrence, prior to the current one, wasn’t seen for another 9 years, on September 3, 1999. That was the high close for nearly the next two months, as once again the S&P went through a month-long decline, then heavy volatility – and another bottom – in October.

Across the four instances, the future 30-day return after these “Oil over Bank” streaks was -4.5% in the S&P 500, with all four showing consistent negative returns. After 60 days, three of the four were still negative, and the average return dropped to -6.5%, but that was mostly due to the dramatic decline in 1987.

The longer we wait for this pullback the more susceptible I believe the market is to a crash-like sell off. Probably not of the 1987 magnitude but it could be swift and blindside those being too complacent. I would prefer it that way myself because I am eager to start making money again. I will not chase the market at this point so the sooner we sell off, the better.

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