Volatility
I assume that most of you reading this know what happened in the U.S. markets last week. It was difficult to avoid the media coverage. We witnessed historic volatility in that, for the first time ever, the Dow moved 400-points in one direction or the other for four straight days.
Volatility tends to accompany poor market performance and some systems, like our Trader Fred System, avoids it like the plague. It prefers to stay out of the way of the stock funds when volatility is rising. That’s one reason that it has avoided virtually every major drop in the stock market since it started in 2007 (+31.8% vs. -8.1% for C-fund during that period), and why it is still showing a positive return this year despite the market losses. Actually, 3 of our premium services are still positive for 2011.
We have other systems that embrace the volatility; looking to pick tops and bottoms in an attempt to capture the sometimes large moves that follow off of tops and bottoms. The more risk you take in your account, the higher your changes of big gains, but also big losses in the short-term, and in a market environment like this, it tests your tolerance for dealing with such swings.
Catching market swings just right can be a very rewarding experience – padding your TSP account balance quite nicely when you pick a bottom or sell near the top. But when you are wrong, you start to rethink your entire investment approach. You learn a lot more, both about investing and yourself, when markets go against you, than when you are doing well.
The strong finish last week helped the TSP funds recover from early deep losses. The C-fund closed down 1.64% for the week, the S-fund lost 1.01%, and the I-fund fell 1.49%. Bonds (F-fund)gained 0.90%, and the G-fund was up 0.04%.
For the month of August the C-fund is now down8.67%, the S-fund has lost a painful 11.43%, the I-fund is off 1.065%, the F-fund has gained 1.61%, and the G-fund is up 0.08%.
The S&P 500 is trying to establish a low near the 1100-1125 area, and it is very possible that this is a short-term bottom, but there has been a lot of technical damage done to this index and overhead resistance may be tough to crack - particularly if the headlines out of Europe remain dire, which has been more of an influence on our markets than most know. The debt ceiling fiasco was what it was, but Europe and the U.S. economic data were the ones really calling the shots over the last few weeks.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Not surprisingly, investor sentiment is very low. Friday’s Michigan Consumer Sentiment came in at a 30 year low. That sounds bad, but history shows that this is likely a positive for stocks. Markets tend to bottom when everyone is bearish.
The Rydex Cash Flow Ratio shows us just how bearish investors have become. The high ratio (low in direction on the inverted chart) of people in bearish funds (funds that make money when stocks go down) or in a money market, compared to those invested in bullish funds(funds that make money when stocks go up) is down near 1.20.
Chart provided courtesy of www.decisionpoint.com,analysis by TSP Talk
The last time we saw a reading near 1.20 was at the 2010 market low, and that was even lower than the 2009 bear market bottom reading.
Is it different this time? I don’t know. We can always find a reason to be bearish, but when this many investors are not in stocks, it doesn’t leave a lot of people left to sell. That is what is called a contrarian indicator. Going against “the herd” when readings are at extreme levels is what the smart money does. So, what are you going to do?
Good luck, and thanks for reading. We will be back here next week with another TSP Wrap Up.
Tom Crowley
www.tsptalk.com
Weekly Wrap-Ups Archive
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.
I assume that most of you reading this know what happened in the U.S. markets last week. It was difficult to avoid the media coverage. We witnessed historic volatility in that, for the first time ever, the Dow moved 400-points in one direction or the other for four straight days.
Volatility tends to accompany poor market performance and some systems, like our Trader Fred System, avoids it like the plague. It prefers to stay out of the way of the stock funds when volatility is rising. That’s one reason that it has avoided virtually every major drop in the stock market since it started in 2007 (+31.8% vs. -8.1% for C-fund during that period), and why it is still showing a positive return this year despite the market losses. Actually, 3 of our premium services are still positive for 2011.
We have other systems that embrace the volatility; looking to pick tops and bottoms in an attempt to capture the sometimes large moves that follow off of tops and bottoms. The more risk you take in your account, the higher your changes of big gains, but also big losses in the short-term, and in a market environment like this, it tests your tolerance for dealing with such swings.
Catching market swings just right can be a very rewarding experience – padding your TSP account balance quite nicely when you pick a bottom or sell near the top. But when you are wrong, you start to rethink your entire investment approach. You learn a lot more, both about investing and yourself, when markets go against you, than when you are doing well.
The strong finish last week helped the TSP funds recover from early deep losses. The C-fund closed down 1.64% for the week, the S-fund lost 1.01%, and the I-fund fell 1.49%. Bonds (F-fund)gained 0.90%, and the G-fund was up 0.04%.
For the month of August the C-fund is now down8.67%, the S-fund has lost a painful 11.43%, the I-fund is off 1.065%, the F-fund has gained 1.61%, and the G-fund is up 0.08%.
The S&P 500 is trying to establish a low near the 1100-1125 area, and it is very possible that this is a short-term bottom, but there has been a lot of technical damage done to this index and overhead resistance may be tough to crack - particularly if the headlines out of Europe remain dire, which has been more of an influence on our markets than most know. The debt ceiling fiasco was what it was, but Europe and the U.S. economic data were the ones really calling the shots over the last few weeks.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Not surprisingly, investor sentiment is very low. Friday’s Michigan Consumer Sentiment came in at a 30 year low. That sounds bad, but history shows that this is likely a positive for stocks. Markets tend to bottom when everyone is bearish.
The Rydex Cash Flow Ratio shows us just how bearish investors have become. The high ratio (low in direction on the inverted chart) of people in bearish funds (funds that make money when stocks go down) or in a money market, compared to those invested in bullish funds(funds that make money when stocks go up) is down near 1.20.
Chart provided courtesy of www.decisionpoint.com,analysis by TSP Talk
The last time we saw a reading near 1.20 was at the 2010 market low, and that was even lower than the 2009 bear market bottom reading.
Is it different this time? I don’t know. We can always find a reason to be bearish, but when this many investors are not in stocks, it doesn’t leave a lot of people left to sell. That is what is called a contrarian indicator. Going against “the herd” when readings are at extreme levels is what the smart money does. So, what are you going to do?
Good luck, and thanks for reading. We will be back here next week with another TSP Wrap Up.
Tom Crowley
www.tsptalk.com
Weekly Wrap-Ups Archive
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.
