February 18th Weekend Update

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I generally look at the TSP funds on a weekend-basis rather than a daily; the signals simply do not change that often so daily review is often the first to go in my time-constrained world.

The F-Fund, represented by the ETF AGG, which is the iShares Lehman Aggregate Bond Fund, while having a poor weekly view (e.g., it's in avoid mode), has signaled a short-term buy as of this past Tuesday.  I don't play the F-Fund but for those of you who do, you may want to give it a review.  Note that it is at comparable levels to the May 2010 time frame, and we all recall that the May - August period was one of declining equity markets but increasing bond values.  It's a different world now, because of interest rates, so do your homework.

Undoubtedly, the question of allocation will come up.  First, let's look at the overall performance of 4 ETFs which represent the available funds within the TSP universe:

We can see that over the past month, AGG / F-Fund has been lagging, and is down -0.56% over the measured period.  We also see that the equity markets are continuing to move higher, which generally does not happen (e.g., equity and bond markets typically are out of sync).  So where is the money actually flowing?

For this, I use a tool called Effective Volume.  EV measures the movement of money flow in and out of a security, and does so based upon the size of the transactions that cause a price change.  Hence, a valid hypothesis is that if the equity markets are in trouble, we should see money flowing out of them and into the bond markets.  Let's have a look.

The EV site above does not track AGG, as it's not a very dynamic nor huge-volume ETF.  Another site has adopted the EV methodology and while there are some issues with this alternate site, the presentation will serve our purposes.  Here is what Monest.net has to say about AGG and other "TSP tracking" ETFs:

The bottom panel shows Large Effective Volume (LEV, red), Small Effective Volume (SmEV, blue), and total EV, (TEV, green).  What we see here for AGG does not support a new signal in AGG -- LEV is flowing out while SmEV is constant, even over the past few days, essentially taking away any confidence that a rally in AGG will be sustained.

Because of this flow out of AGG, I personally would not consider moving anything into AGG at the present time.

I urge you to research the charts for SPY (C-Fund), EFA (I-Fund), and VXF (S-Fund), as the results will be  instructive and should cause you to post a question or two.

Regards,

pgd