So far we have only seen a minor 6% correction in the SP500 (TSP C fund). Often the smaller corrections bounce back in a “V” bottom and end back close to their old highs. The larger 10%+ corrections usually have a “W” bottom and retest their lows after a bounce. Looking at the chart below, the setup looks more like a “W” will form with a retest this week.
I’m surprised the market did not bounce more this last week since it was options-expiration week and our almanacs tell us on average it is a positive week. Or maybe that is why the market only dropped 6%. Our trading-day almanacs also tell us post-option weeks are usually weak.
Which seems more likely based on the small caps price action on Friday. Nothing is guaranteed, but if one was playing the percentages then the odds are in favor of another pullback of unknown size next week. As long-term investors these short-term movements are interesting but only become a concern if our risk indicators do not recover after a bounce in price.
Expecting a test of lows this week
Of course the news can change over the weekend and send the market up.
But looking at the news this weekend there are more unhelpful stories than market positive. In Europe, Britain’s divorce from the EU is not going well. Since they have not figured out how to handle trillions in derivative contracts in case of a hard Britex the markets might become a bit concerned at some point.
And Italy’s newly elected anti-EU government’s relationship with the unelected bureaucrats in the EU is heading for confrontation.
It seems the EU threatening to take down Italy’s banking system which is usually not good for the markets. Italians are scrambling to get their money out of Italian banks (can you say “bank run”) and the European Central Bank took their fat QE thumb off the Italian interest rates so we will get to see how the free market prices in risk very soon.
Meanwhile in the land of a million ponzi schemes, the Chinese economy is in a pronounced slowdown, so expect another round of stimulus and a significant exchange rate drop that will offset our tariffs. China’s stock market was down 30% last week until their national plunge protection team jumped in to save the margin calls.
Meanwhile, interest rates are jumping higher not because of inflation but because our Treasury will have to sell $1.2 trillion in 2019 to finance the government thanks to the massive tax-cut induced budget deficit. At the same time the Fed is unloading $600 billion from their balance sheet to make sure long-term rates start moving higher along with short-term rates.
This is good for the measly m-i-g-h-t-y TSP G fund since long-term Treasuries determine its interest rate paid to you. The G fund’s interest rate is passing through 3% on its way to 4.5% until of course the next financial crisis… but we won’t go there now.
Will the free markets please be allowed to set rates again
BTW, this means mortgage rates are climbing through 5% on their way to 6% which would require a 20% reduction in home prices from interest rate lows to maintain the same monthly payment on a new mortgage.
Needless to say, the housing boom is coming to an end at the same time growth in the auto sector is struggling thanks to slowing Chinese demand. Without the positive economic effects of hurricane rebuilding and tariff induced inventory front-running, 2019 in not lining up to be a strong economic growth year.
If tax cuts for the rich flowed into consumer spending then I might change my tune, but they don’t so I won’t.
And when discussions turn to cutting social spending after the elections, the rule-of-thumb is every 1% cut to spending (to the bottom 80%) equals a 2.5% reduction in the economic growth. This multiplier effect works both ways which is why a payroll tax cut would have seen significantly more economic bang for the lost tax revenue bucks.
Of course the stock market has not cared about the economy or profits for most of this bull market, so we will stick to watching our indications of what risk-sensitive investors are doing and follow their lead out the exit before the euphoric retail investors catch on.
Invest safe, invest smart
Our Fall Summary Report has been posted on our website for members.
Categories: Perspectives, TSP Charts