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TSP Talk - Is it too soon to get bearish?

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The boring stocks led the market on Friday as the Dow made it 8 straight winning sessions in a row led by companies like McDonald's, Honeywell, Verizon, and American Express. Meanwhile the Nasdaq was down, small caps were down, market breadth was negative and it was directly related to yields rising and, as you'll see below, that's going to be the key in the next couple of weeks as the indices approach or test their prior highs.

Daily TSP Funds Return
I am often torn between macro-views and short-term investing / market timing. Most "normal" people don't feel this way but for me the buy and hold approach to investing, while super successful - at least through Friday, seems very dangerous. I had money in the TSP when the 1987 market crash (very little as I was just starting out.) I had money in the TSP during the dot com bubble bursting, the financial crisis, the COVID crash, and every little correction in between. Some people can do it, but based on my personality, I came to the conclusion a long time ago that it's too tough for me to watch my account balance go down and not try to do something about it.

20% bear markets, 30% losses, 40%, 50% and in the case of the Nasdaq during that dot com bear market, nearly 80% declines are not common but they happen, and more often than we'd like to think. It's a disaster for your account, especially the closer you are to retirement. So far they've all come back, but there's no guarantee. It took the Japanese Nikkei stock market over 30 years to get back to its 1990 high.

I'm not saying I avoided all of those market stumbles, but I was actively trying to. It's the buy and holders that can make a lot of money in bull markets, but they also take the full force of the bears markets if they are not widely diversified.

This could get very long and opinionated if I go down this "to buy and hold, or not" discussion, but as I talked about last week, right now even the king of buy and hold is selling. Warren Buffett not only has his largest cash position ever in the Berkshire Hathaway portfolio after selling Apple earlier this year, it is now his largest holding. That is, cash and Treasuries as he said getting 5% in a short term bond right now beats the potential of the stock market at these valuations, without risk, than trying to find something that is valued to the point that it is a good deal.

So, as the happy buy and holders love what they are seeing in their accounts these days, there are a lot of people like Warren Buffett who are preparing for the next shoe to drop.

Being someone who watches the market carefully, that doesn't mean I am selling everything today and waiting for the next 40% decline, but at my age I feel like it's time to be more nimble than usual over the next few years, considering what's going on in the world, where stock valuations are, and the fact that cash and bonds (basically the G-fund) are paying fairly well with little to no risk.

It may or may not allow me to beat the buy and holder over the next few years, but I'll have my say rather then letting the market blindly dictate the value of my account. I'm not going into hiding or selling everything right now (at least that's not the plan this minute) but I will do more hit and run investing, which isn't much of a divergence from my normal approach.

The market has been acting well recently and it will tell us when things are changing. It's tough to guess when that will happen. Once we see signs of a shift from the current bull market, which could come any time between this week, next year, or whenever, I will be less of a buy the dips investor, and more of a sell the rips market timer. Current valuations and conditions have me believing it could be sooner rather than later.

The bond market, particularly the 10-year Treasury Yield, is the key right now as it is a gauge for inflation and economic strength or weakness. The fact that the Fed is trying to slow down the labor market and inflation, and investors are wanting lower interest rates, it makes for a messy situation where investors are cheering poor economic news. A strong economy tends to lead to higher yields and interest rates, and right now the last thing investors want is for yields to rise again. When yields are moving, check out how the S&P 500 moves counter to those moves. Friday's move up in yields, after holding at the 50-day EMA all week, may lead to some concerns coming into this week. If instead we start seeing the yield move below 4.45%, the rally in stocks would likely continue.

And this week is another options expiration week. Historically expiration weeks have had a bullish bias, but not so much this year. But notice that any short term pullback during expiration week this year has produced a short-term low in the S&P 500. Perhaps that means a pullback this week can be bought? That is if yields are cooperating and not making new highs.

I sound all bearish but I am really trying to stay open to the current situation, which has been bullish, but I am ready if the market, charts, or indicators want to take us there.

The S&P 500 (C-fund) had another one of the spinning top formations on Friday suggesting a lot of indecision from investors. It tends to coincide with a shift in the market but not always, and nothing works every time. It's a tendency. Trading volume continues to dry up so there's not a ton of money coming into the market, but no one is selling either. The rally off the recent lows has now retraced all of that large negative reversal day on April 4. It would be unusual for it to have some this far without retesting the high, but any kind of failed breakout would be very bearish.

DWCPF (S-fund) took a hit on Friday and so far the top of that open gap from May 9 is still holding as resistance. There's a little more resistance near 2060 and some support at the open gap 2000. At 2033 currently, it's right in between the two right now.

The EFA (I-fund) has made a new high and while the I-fund has lagged the S&P 500 this year, it is outpacing the more popular S-fund. The Federal Reserve continues to reduce their balance sheet and that gives the dollar some firmness, and that could keep the I-fund from catching the C-fund this year.

BND (bonds / F-fund) was down on Friday with that rally in yields. This chart has improved quite a bit in recent weeks, but it remains in a downtrend and it's much closer to the top of its descending trading channel than the bottom.

Thanks so much for reading! We'll see you back here tomorrow.

Tom Crowley

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  1. JTH's Avatar
    Thanks Tom, ya know that 2-Month 2020 -35% bear market, really began to change my approach towards risk. Adding to that, watching BND's bonds drop -24% really makes me question the stability of the markets. Prior to these events (and the inflation that followed), I didn't particularly watch what the economy was doing because I somehow believed our government would "mostly" do the right thing.

    Not that I had much trust before...

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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