TSP Talk Blog

Well, it's the end of a wild month, and a wild year for the stocks market. Friday's action closed rather flat, but mixed, and the action was choppy with decent afternoon gains being given back in the final hour of trading. The Dow lost 76-points, but it felt worse since it was up over 240 with an hour to go in the day. The S&P was down on the day, but small caps and the I-fund ended the day with decent gains.

Daily TSP Funds Return More returns

The next few days of trading have a positive seasonal bias, but obviously we have not been experiencing typical behavior. And, as the data below shows, the last trading day of the year hasn't been all that great in recent years - 11 of last 14 were down. Perhaps that's because stocks have been up for the year on the last day of the year and there was some profit taking. This year there is a sea of red in the indices for the year, so perhaps we'll see a break in the trend for the last day of the year?

Also, as shown below, the first trading day of the New Year can be a big day, but we've seen both big up days and big down over the last several years. So where (which fund) you start the year in could be a tone setter for your account in 2019.

I posted this on Friday but will leave it up another day for reference, in case it helps you make some kind of decision. In the spreadsheet data below, I've highlighted some particularly bad (red) stretches and good (greenish?). From 2014 - 2016 the action surrounding the New Year was fairly poor, both before and after. The last two years saw decent starts after weak finishes to the prior year. The S&P 500 finished in positive territory in 14 of the last 15 years. We saw 5 decent years from 2003 - 2007 before the dreaded 2008 bear market took a lot of those gains away. Those big gains made from 1997 - 1999 (actually it goes further as 1996 was up 22.85% and 1995 gained 37.41%) were cut with three consecutive losing years from 2000 - 2002. So, will the losses in 2018 (assuming the S&P finishes negative) be enough to offset the huge gains from 2009 - 2017, or do we need to see another year or two of losses like in 2000 - 2002?

In late 2008, the last negative year for stocks, we saw a great Santa Claus rally to end the year, and also a sharp, quick spike higher to start 2009. The first 2 - 3 trading days in the new year are still considered part of the Santa Claus rally because of its strong record over the years. But once that Santa Claus rally ended, we saw everything reverse down by Wednesday January 7th, the 4th trading day of the year in 2009, so the action had investors leaning the wrong way for sure. I would love to take advantage of a rally like that to start the year, but is it worth the risk in this bear market? It worked in 2008, but it could certainly backfire.




To put things into perspective, in December of 2008, just before the Santa Claus rally, the Fed cut interest rates from 1.0% to 0.00 - 0.25%. That was the last time they cut rates and they were basically at that 0% rate for another 8 years. Fast forward 10 years and the Fed just raised rates again in December for a 4th time in 2018 to 2% - 2.25%, and they are planning two more kikes in 2019 at this point. They are trying to slowdown an overheating economy - or keeping inflation in check - but in the process, along with tariff question marks, a government shutdown, a global economic slowdown, along with political chaos, they have added to the headwind hitting the stock market.

Let's not forget, even if they do stop raising rates, they are still unwinding their balance sheet as years of quantitative easing has now become quantitative tightening, which makes lending tougher.

So, we'll enter 2019 with a lot of headwinds, but a stock market that has been beaten down. The question is whether it has been adjusted to the point of being correctly priced, or is there more to go?

The market is still oversold and we are seeing many other extremes in the indicators that a could produce a good sized rebound, particularly if investors can be thrown a bone of good news like a budget deal to end the shutdown. The problem is, the angle of the recent descent makes a test of the lows a very good possibility as well, and there we have the dilemma. To play for a big bounce, or to wait for a retest - which would need to hold. Both could happen, but if you do try to play the moves, be nimble. Snoozing during a rally could get you caught in the next drop, while ignoring the oversold conditions could have you missing a big opportunity. Although it is tough, you can make money in a bear market, but you have to be on your toes. Expect volatility to continue but don't expect to be able to catch every turn.

---

The S&P 500 / C-fund chopped around most of the day on Friday before a late spike higher was followed a sharp dip lower and it closed just south of break-even. The action created a candlestick formation called a spinning top, and they can be reversal patterns as you can see in the chart. The next couple of days could be chaotic but watch which gets taken out first - Friday's high or lows. That may dictate the direction of the next move. At some point I'd expect to see 2350 again. The question is whether it can add onto this bounce in the interim while the indicators are still oversold.




The weekly chart shows 2300 as some possible strong support, while the 2600 - 2650 area could be stubborn resistance. But there's a lot of room in between those levels and that's where traders can make some money if they play it right. I also circled some prior major correction lows, most of which pulled back to retest the lows. The correction in 2014 (blue arrow) was one that produced a "V" bottom with no retest.




The DWCPF (small caps / S-fund) broke above a descending resistance line so it could have room to run. That's one actual positive outside for this beaten down fund, but that spinning top makes today's action critical.




The EFA (EAFE Index / I-fund) also moved above a couple of key levels - the descending trading channel (red) and back into the blue flag formation. Is that an invitation to move back up to test the top of the channel and 50-day EMA?




The Yield of the 10-year Treasury has been sliding lower since the double top in November. It fell below that support line earlier this month, and now it may be targeting that open gap from back in January near 2.675%. There's also another open gap just below 2.6%.




The AGG (Bonds / F-fund) made a new high on Friday and despite breaking below that tight trading channel, it remains in an uptrend.




Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

Thanks for reading. Happy New Year! We'll see you on Wednesday.

Tom Crowley


Posted daily at www.tsptalk.com/comments.php

The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.