Well as we now know, Malaysia Airlines lost a B-777 airliner over Ukraine yesterday July 17, which was clearly a tragic event, with early reports indicating a surface to air missile being the cause. It is my opinion, that this reflects the difference between trained, professional, soldiers, in an organized military force of a flag-bearing nation (even if “enemy”), versus caveman-savage rebels/terrorists with varsity level equipment at their disposal (Surface to Air missiles). This is a TSP site, not a political one, so I will stop there. I commented on a previous IL-76 cargo plane shoot-down in my June 16 post, regarding unarmed cargo planes being shot down. One month (almost to the day) later, a commercial, civilian, airliner is shot down.
Not surprisingly, the market sold off hard the same day, and as I have commented before, almost all market behavior is psychological in nature and the result of humans acting out of fear, greed, and (at times) optimism.
I, like all of you, was taken aback by the market sell-off but I have chosen to remain invested in stocks and the TSP stock funds. Since we cannot predict “Black Swan” events such as the above (or anything else for that matter- many talking heads on cable TV news claim however that they can predict stuff….), I choose to respond to the market itself. In most cases, past behavior is reflective of future behavior. It should be noted that the next day, July 18, the markets rallied, with the Dow Jones index closing up 123 points.
The SP 500 index has had multiple days of selling, on above average volume, also called “distribution”, in recent weeks. This is not healthy for any uptrend, and multiple days of selling can stall and reverse the uptrend into a downtrend and into a new bear market. This activity requires that we keep our trigger fingers close to the G-Fund trigger guard. It should be also noted that the S-Fund (small cap stocks) have taken a drastic turn to the south, largely due to the BioTech sector taking a beating in the press. The leading fund is currently the C-Fund.
Historically, when a bull market “tops out” (reaches the highest point it can go, then goes flat, then starts into a bear market), large cap stocks (such as the C-Fund holdings) are the last ones to fall, and are outperforming everyone else. This is because the “big money” investors (hedge funds, mutual funds, retirement plans aka TSP) typically gravitate towards larger stocks and perceived blue chip “stable” companies. It is easier (and your customers won’t be asking questions) to invest $50 Billion into Microsoft or Boeing stock than it is into smaller company stock such as a Biotech with a pending FDA approval or a company selling solar panels for your house. However, this very behavior (large cap stocks outperforming all others) can be used to identify turning points in the market, and shifts in sentiment.
It should be noted that in the early stages of a new Bull market, people are excited, and motivated, and tend to invest in the riskier, “next big thing” companies, which are in almost all cases small-cap stocks. Therefore, when you see small cap stocks start to outperform large caps, and you have additional indications (volume, index price performance) that a market trend change is occurring, you can often get into position for a new Bull market way ahead of everyone else, usually with profitable results.
Lets cut to the chase, I am moving my TSP Allocation to 50% S-Fund and 50% C-Fund. I am not going fully 100% C-Fund because I think (my opinion) that the small caps have taken some underserved hits over the last 30 days and I anticipate some health returning to that category. I could be mistaken, but these are not “normal times” and I can’t remember in over 20 years of active trading experience, markets facing so many issues at the same time. We have crude oil and middle east problems, and serious problems with Iraq violence. We have a possible American exit from Afghanistan, a source country of terrorism. We are sanctioning Russia, a country we “need” to serve as referee when other countries will not listen to us. Many emerging market nations, as if the above issues are not enough to swallow, have ongoing debt and fiscal issues (Portugal, Argentina, etc) which can have a viral affect into world markets.
YTD returns (we are now into the second half of the year, July 2014) reflect a 7% return on the C-Fund and 6% return on the S-Fund. While this is better than nothing, it is not that great either. And our TSP row-boat has had to ride thru a lot of storms and waves on the way to any gains. This is why I advocate the G-Fund in times of market turbulence. Yes, it is hard to quantify or establish data to “justify” going to the G-Fund, especially when the market resumes up a week or two later. However electing to not use the G-Fund as a tool in our tool box would be like electing to not pay home owners insurance, because “I have never had a fire in 20 years.” The “past data” of no fire history reflects that you probably will not have a fire next year either. But what if you do ? Can you recover from that ? Do you want to try ? Roll the dice ? G-Fund is akin to insurance, it is safe-haven in times of market problems and turbulence. Yes, exiting to G-Fund affects overall percentage gains. However it is a trade-off for peace of mind (at least for me) versus enduring elevated risk in times of market turmoil.
In summary, I am 50% S-Fund and 50% C-Fund as of now. Due to the various international problems, I am refraining from investing in I-Fund at the present time. We need to keep an eye on things, as the current bull market may be topping out, with a new bear market possible in the months ahead. At the end of the day, nobody can predict or crystal ball things, and we must react to the market itself.
Thanks for reading and talk to you soon. Please continue to share my site with friends and colleagues. Have a great weekend everybody…..