In this month’s article I outline why I will maintain my allocation to the SPDR S&P 500 ETF (NYSEARCA:SPY) in June to 50% with the other 50% of my assets to cash. First let me review my pension plan performance in May. The market, as measured by the S&P 500 index, gained 0.01%. As for my pension plan assets, I slightly outperformed the index by gaining 0.22% in May. My investment objective of preserving my capital was met as I made money and I did meet my second investment objective which is beating the S&P 500 index. Table 1 below shows my returns and allocations for the month of May and Table 2 below shows my returns for the past 12 months.
I have made changes to Table 2 below after I received a comment from a reader. Table 2 shows new columns to better (more accurately) reflect my investment results. The third column, $100K Hypo, is what my returns would be if I started my account with $100,000 in my first article of this series and followed the allocation recommendations from my articles. The fifth column, $100K SPY, shows the returns of just investing $100,000 and keeping it all allocated to SPY. The percentage returns in the last row show that my strategy returned a negative 1.02% for the last 12 months and simply investing in SPY would have returned a negative 0.38% for the last 12 months. Therefore, I have underperformed SPY for the last 12 months by a negative 0.64%.
Table 1 – Investment Returns for May
Table 2 – Investment Returns Last 12 Months
To review the purpose of this series of articles, my retirement account only allows me to buy the following four ETFs: iShares Core U.S. Aggregate Bond ETF (AGG) , SPDR S&P 500 ETF (SPY) , iShares Russell 2000 ETF (IWM), and iShares MSCI EAFE ETF (EFA). I can also have my money in cash. The question is how to decide where and when to allocate money to these various ETFs.
I use my moving average crossover system combined with relative strength charts to determine how to allocate my pension plan assets. My moving average crossover system uses the 6 month and the 10 month exponential moving averages to identify which of the four ETFs are in a position to be bought. If the 6 month moving average is above the 10 month moving average then the ETF is a buy. I call this setup being in bullish alignment. When the 6 month moving average is below the 10 month moving average the setup is referred to as a bearish alignment. When a bearish alignment happens, I don’t want to hold that asset. See Chart 1 below for a long-term look at the S&P 500 index using my moving average crossover system.
Chart 1 – Monthly SP 500 Index with 6/10 Moving Averages
You can see that the moving average crossover system provided some excellent long term buy and sell signals that would have allowed investors to capture long duration moves in the index; while avoiding costly drawdowns. Avoiding these costly drawdowns allows me to meet the objective of capital preservation.
I employ this strategy because I do not want to experience a large drawdown with my pension assets. During the 2008-2009 market crash many people didn’t even look at their retirement statements because they were afraid of what they would find. I submit that if those people would have used a market strategy like what I outline in this series of articles, they would have been able to avoid much of the decline during the bear market and consequently would have had less emotional stress during that time period.
The following charts show the current status of the ETFs that I am allowed to buy in my retirement account.
Chart 2 – Monthly SPY with 6/10 Moving Averages
Chart 2 shows that SPY closed the month of May almost even. SPY had a doji candle and ended up being positive by 0.23%. That doji candle shows that bulls and bears battled during the month and neither side could keep their gains. However, gaining 0.23% for the month is a big improvement considering last month’s dismal showing. SPY remains below its red 10 month moving average. The blue six-month moving average remains just above the red 10 month moving average. This condition prevents SPY from being in bearish alignment. Because of that condition, I will stay with my current allocation. The market is still trending lower as both moving averages are rolling over. We are also no longer in the seasonally favorable period of stocks which runs from November to May. We will see how June unfolds.
Chart 3 – Monthly IWM with 6/10 Moving Averages
IWM rebounded from last month’s terrible showing. IWM inched out a 0.19% gain. It too had a doji candle for the month. Notice that the doji candle found support right around the green line which I identified last month as a possible support zone. We will see if that support holds. IWM is in bearish alignment and the trend is down.
Chart 4 – Monthly IWM:SPY Relative Strength
Chart 4 shows that the IWM:SPY ratio is remaining at its lows. It will be interesting to see if these lows hold or if the ratio makes new lows. The ratio remains in bearish alignment. You can also see that the ratio has been making a series of lower highs and lower lows since the beginning of 2021. That is the classic sign of a down trend. Investors still prefer large cap U.S. equities over small cap U.S. equities. I will need the ratio to close above the red 10 month moving average before I consider allocating money to IWM over SPY.
Chart 5 – Monthly EFA with 6/10 Moving Averages
Chart 5 shows that EFA was the big winner in May by gaining 2.00%. This was the best performing equity ETF I follow for my pension plan account for the second month in a row. EFA remains in bearish alignment. For the third month in a row, the $67.50 area is acting as support. We will see if that level holds this month or if EFA closes below that level which would be another bearish indication for EFA.
Chart 6 – Monthly EFA:SPY Relative Strength
The EFA:SPY ratio, while remaining in a downtrend, is showing some strength. The ratio gained 1.77% in May and managed to close above its six-month moving average. As stated before, I need to see this ratio close above the red 10 month moving average before I allocate money to EFA over SPY.
Chart 7 – Monthly EFA:IWM Relative Strength
Chart 7 shows that EFA outperformed IWM in May by 1.80%. The ratio remains in bullish alignment. This is the only bullish alignment you will find in this article. The ratio is making a series of higher highs and higher lows while the two moving averages are now trending higher. I will continue to watch this chart to see how events unfold.
Chart 8 – Monthly AGG with 6/10 Moving Averages
AGG gained 0.76% in May. AGG is in bearish alignment and the distance between the two moving averages continues to widen. The next level of support may be the level around $100 which is identified by a horizontal green line. Perhaps AGG can put in a stand at that level. AGG outperformed all the other ETFs in this article except EFA.
Chart 9 – Monthly AGG:SPY Relative Strength
The AGG:SPY ratio in Chart 9 gained 0.53% as AGG outperformed SPY in May. The ratio remains in bearish alignment. There is no reason for investors to favor bonds over stocks currently.
In summary, every ETF I covered in this article was higher for the month of May. Foreign stocks, represented by EFA, were the big winner gaining 2.00%. AGG, IWM, and SPY all had more modest gains for the month. I am maintaining my 50/50 allocation to SPY and cash. We are now entering the unfavorable months for the stock market; June–October. There is a lot of talk about a bear market, recession, etc. Is the bear market over or is it just beginning? I don’t know. I just try to follow price and the trend. Right now, my charts are saying that SPY is still the best performing ETF as it is not yet in bearish alignment. Due to SPY being below its red 10 month moving average, like all the other ETFs in this article, I will remain cautious and park half of my assets in cash. I will monitor the markets for the month of June and then reallocate, if necessary, at the end of the month.