Are large and frequent moves via rebalancing within a 401k, without cost or penalty?

There is no regulatory penalty for doing that in a 401k.

The IRS does give itself latitude to invalidate plans that are actively traded, as a deterrent to keep the spirit of the 401k purpose: growing conservative retirement funds. But this is not extended to employees and would be levied against solo 401k owners / the sponsor. I haven't heard of it being done, it very obscure for the IRS to police, but they do have the deterrent there.

• Brokerages can enact rules which prevent "frequent trading" of mutual funds (Vanguard does this with some of their funds -- mostly bonds), which means that you might not be allowed to do what you want to do.
• There are no tax ramifications, since all the taxes are paid as regular income at withdrawal.

Am I misunderstanding your question?

Your question is

Are large and frequent moves within a 401k (like the example above) without cost or penalty?

and your example is:

One week the employee expectes a market crash. He sells/buys via re-balancing all his/her funds and places them into the companies stable fund. The next week, believes a certain sector will do very well and one of the companies funds is heavily mixed in it. Again sells/buys via rebalancing into that fund. Etc, etc. each week or couple of days.

You 401(k) plan may have rules to prevent this type of treading. One plan I belonged to about 10 years ago prevented this by imposing a limit on some moves to once every 30 days. My current plan does something similar.

In the past there were stories about some participants in the Thrift Savings Plan, which is the US Government 401(k) plan, who making moves between the funds almost every day. In some cases longtime employees were able to move more than $1,000,000 between the funds. Eventually the TSP rules were modified to limit the number of transfers they could do each month. Before the TSP limits were imposed there was great debate about the issue.

The rules to limit the number of transfers are for two reasons:

• The idea is to prevent people from using their retirement money to try and time the market, which if they did wrong they could result in a smaller balance compared to only occasionally making changes.
• Every intra-plan transfer still has costs for the plan. Allowing daily transfers drives up the administrative cost of the plan. If enough people are moving large sums of money it is felt one of the great benefits of the TSP, which are the extremely low expenses, will be eroded.

I don't know if your plan limits moves. I don't know if a plan could charge a participant if they exceed some small numbers of moves in a month. I do know there is no tax issue because all gains/losses stay withing the 401(k) plan.