TSP Talk – We need more TSP options

Good Monday morning TSP participants. It’s time for your weekly TSP Talk.

Stocks opened in dire straights on Friday, but quickly found their footing turning a 150-point decline into a small gain by the afternoon, but by the close sellers jumped back in and took the Dow down 119 points.

After a dismal 2008, the TSP stock funds ended down 8% to 12% in January, and now another 10% in February. Taking a look at all of the red in the TSP fund returns above, it is becoming more obvious that TSP participants need another option to invest in. Perhaps a gold or precious metals fund, or even a fund that shorts the market (bet against the market), in an attempt to make some money during bear markets. How long can we go on, not only not making money, but losing money if you are in any fund other than the G-fund?

The S&P 500 has now clearly broken the 741 low made in November of last year. I will give it another day or two before I say that the low is not in, and that this is not a bottom but the start of another leg down. But with the Dow and Dow Transportation Index both having penetrated the lows for more than three days, I think the odds are stacking up against the S&P 500.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

That said, things are so bad, that I would expect some kind of rally this week or next. The question is, how low can it go first, and who will be brave enough to step up and buy in front of Friday’s jobs report? Perhaps the jobs report will trigger a capitulation-like sell off that will give us another short-term buying opportunity?

Speaking of capitulation, the Cycle of Market Emotions seemed like it was nearing a bottom last fall, but since it did not, I suspect that we still have a capitulation to go through. We are seeing signs of people completely giving up, and you get people like me saying things like, “we need more TSP fund options because we can’t make money in C, S, and I funds.” That is actually a good sign. Too much bearishness.

There will likely be more damage, but each day we are getting closer to a bottom. It could take weeks, months or years, but it’s getting closer. Right now I am not as concerned about finding THE bottom, as much a finding A bottom. The only way to make money in this bear market, aside from the pennies we can get in the G-fund and the sometimes iffy gains of the F-fund, is to try to catch a rally when we get them. It is a risky proposition, but no risk, no reward.

The market is oversold, but off the -1200 extreme we saw last week. We may need to revisit the -1500 area, as we did twice last year, before we see a rebound.

Sentimetrader.com’ Smart Money / Dumb Money Confidence indicator saw the dumb money reading hit 21. That is quite low, although we did get four other lower readings below 20 in 2008. The smart money is still surprisingly low at 58, and the trend is moving down.

Chart provided courtesy of www.sentimentrader.com

The 21 reading for the dumb money has triggered some decent buying opportunities in the past, as the market saw some very nice rallies within days of the 21 reading, but if you look at the Max Loss column, you can see that sometimes the losses are quite steep before the market turns.

Chart provided courtesy of www.sentimentrader.com

This would go along with the possibility of a temporary market low just before or after this Friday’s jobs report.

A quick look at the dollar shows that it is forming what could be a double top. It has been so resilient that I am reluctant to say it is not going to break out, but technical analysis suggests it is more likely due for a pullback.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The only thing that makes this a tough call is that the dollar’s strength is mostly due to the economic weakness in Europe, Australia, and the Far East, and as long as they are doing worse than we are, the dollar may hang in there. The I-fund would benefit if the dollar does turn south.

That’s all for today. Thanks for reading. These market commentary are updated daily on www.tsptalk.com.

Tom Crowley