TSP Talk – When will the bear market be over?

Welcome to our Monday morning market commenary from TSPtalk.com.

Stocks rallied again on Friday making Thanksgiving week one of the most bullish weeks in many, many years. We know bear markets can have explosive rallies. So, is that what this was, or is the bottom in?

There are many things lining up suggesting that this market may have put in a bottom, but we are in a bear market and we have absolutely no proof that the bear market is over. That means we are also still in a “sell the rallies” mode until something tells us otherwise. The indicators that we would be viewing to tell us if we are in a new bull market will take weeks, months, or even years to turn.

Sure we could miss out on some gains if we sit on the sidelines while the market turns from bear to bull, but bear markets don’t turn on a dime. The bottoming process is a long one and we will get our opportunities when the indicators confirm it.

So what are we looking for? Someone asked this on our message board the other day so I’ll assume others would like to know as well:

In January of this year, the 50-day moving average (purple line below) crossed below the 200-day moving average (blue line). There were no fireworks or news headlines, but that is one of the signs that a market is turning from a bull market, into a bear market. This crossover does not come at the market top, but it did happen while the S&P 500 was still over 1400, and as you know, we have dropped as low as 741 recently. At about the same time the 200-day moving average started to slope downward. That is another sign that a bear market has started, and usually coincides with the 50 crossing below the 200.

Chart provided courtesy of www.decisionpoint.com

So, we can try to call a bottom, but until the 50-day moving average crosses back above the 200-day moving average and / or the 200-day moving average starts to slope upward, we are still considered in a bear market and we will want to sell rallies.

The 50-day moving average is currently at about 966 and the 200-day moving average is about 1187. Both are still moving downward which is why I said that we are weeks, months, if not years away from calling this a new bull market. That is not to say that money can not be made in stocks during these bear market rallies. It’s just that the long-term trend remains down.

The TSP limits really got me good in November, but I did not follow my plan and it cost me. I said many times that we could be setting up for a Thanksgiving week rally… But did I listen? No. I ran out of transfers before the week showed up and I missed some great potential gains. Now we start off December with a new set of transfers, but with a market that is getting overbought.

I want to go over something that I think some people may not be aware of. The TSP allows us 2 transfers per month, but we are also allowed to make additional transfers after #2, if it is moving money into the G-fund, and no other fund is increasing.

The winner of our November returns contest actually made 6 interfund transfers during the month, and the TSP will allow this. He gained nearly 11% for the month, despite the stock funds being down 7% to 11%, and here are the transfers he made:

Nov-05 100% G (transfer #1)
Nov-20 100% C (transfer #2)

He made his initial 2 transfers and was now able to make additional transfers, as long as they were increasing the G-fund allocation, without increasing any other fund’s allocation. You can see below that the G-fund percentage went up with each transfer, while the C-fund’s went down:

Nov-21 50% G, 50% C (transfer #3)
Nov-24 75% G, 25% C (transfer #4)
Nov-25 85% G, 15% C (transfer #5)
Nov-28 100% G (transfer #6)

So if you have made your two transfers for any given month and still have money in any other fund other than the G-fund, you can still make additional transfers into the G fund – all at once or slowly. The problem comes when you are already 100% in the G-fund, you are out of transfers, and you want to get back into the stock funds, which is what happened to me in November.

As far as where the market goes from here, we have indicators that are getting overbought in the short-term, but early December has a positive bias and momentum is starting to build for the bulls. The S&P 500 has now had 5 consecutive positive days, something we haven’t seen for a long time, but when the overbought / oversold indicator starts to reach toward the 500 level, it has been a good idea to move back on defense.

Chart provided courtesy of www.decisionpoint.com

That’s all for today. Thanks for reading and good luck!

Market commentaries are updated daily on www.tsptalk.com.

Tom Crowley