My Current View of the SP 500 Index - September 2016
This series of articles is about how I invest my pension assets. I have four choices: SP 500 (NYSEARCA:SPY), the Russell 2000 Small Cap Index (NYSEARCA:IWM), the MSCI International Index (NYSEARCA:EFA), the US Aggregate Bond Fund (NYSEARCA:AGG), and cash. In order to determine which investment(s) to consider I use two factors. The first factor is my moving average crossover system. Because I am investing for the long term I use a monthly moving average pair. I use the 6 month and the 10 month exponential moving averages to decide when to enter or exit one of the four investments mentioned above. The goal of using the moving average crossover system is its simplicity. When the 6 month moving average is above the 10 month moving average that indicates a buy signal. A sell signal is when the 6 month moving average is below the 10 month moving average. Chart 1 below shows that this technique has given several timely buy and sell signals. On the other hand this technique has also provided some false signals known as whipsaws. Whipsaws are when a crossover signal is given but is then reversed two months later. This causes an investor to buy high and then sell low; the opposite of investment success.
Chart 1 - SP 500 Index with 6/10 Month Moving Averages
The moving average crossover system gave me the two buy signals shown in Charts 2 and 3. Chart 2 shows the recent buy signal generated in the SP 500 index. Since the signal was first generated the SP 500 index has moved higher. Consequently, the two moving averages have also moved higher. While moving averages are considered to be lagging indicators, they are showing me that the overall consensus of market participants is bullish.
Chart 2 - SP 500 Index Most Recent Buy Signal
Chart 3 below shows the most recent buy signal generated at the end of July, 2016. As Chart 3 shows the Russell 2000 Index rose 1.64% for the month. This percentage gain outpaced the SP 500 index represented by the SPY ETF which gained 0.12%. This outperformance is factor number two of my investment strategy.
Chart 3 - Russell 2000 Index Most Recent Buy Signal
My second investment factor is relative strength. When I have two investment choices that have generated a buy signal I want to own the asset, or more of the asset, that is outperforming the other. I use a relative strength price chart to help me decide which asset to own. Chart 4 below shows the relationship between the Russell 2000 Index and the SP 500 Index. The price line has been rising since the beginning of the year. In other words, the Russell 2000 Index has been performing better than the SP 500 Index since the beginning of 2016. This year, outperformance means that an investor made more money being in IWM as opposed to being invested in SPY. However, sometimes an investment that has relative strength means that an investor just loses less money in one investment compared to another investment.
Chart 4 - Relative Strength of Russell 2000 Index Compared to SP 500 Index
This relative strength by the Russell 2000 Index shows a "risk on" mentality by market participants. I find it unlikely that the market is ready to go into a protracted correction or a bear market based on Charts 2, 3, and 4. Is it possible? Of course. But that is not what my moving average crossover system shows. Chart 5 below shows the seasonal performance of the SP 500 Index on a monthly basis since 2007.
Chart 5 - SP 500 Index Seasonal Performance
Chart 5 shows that the SP 500 Index has risen 60 percent of the time in the month of September since 2007. It has averaged a small 0.1% gain in the month of September factoring in the 60% of the times September has been an up month and the 40% of the time September has declined or stayed even.
Chart 6 below shows the same seasonality chart for the Russell 2000 Index. It shows that in September the Russell 2000 Index usually underperforms the SP 500 index. However, the Russell 2000 Index outperforms the SP 500 Index for the rest of the year.
Chart 6 - Russell 2000 Index Seasonal Performance
As for where my investments are positioned, I am currently invested in SPY, IWM, and AGG. Most of my assets are in IWM because of its relative strength compared to SPY. Chart 7 shows that AGG has been a steady performer since December, 2013. A small amount of my account is allocated to AGG.
Chart 7 - AGG Long Term
In summary, there have been no changes in my investments over the past month. My two factor system has me invested in SPY, IWM, and AGG because each of those indexes have the 6 month moving average above the 10 month moving average. My money is mostly invested in IWM because it has relative strength over SPY. The seasonality charts show that IWM may well outperform SPY through the rest of the year. I have no idea if that will happen. However, I will continue to monitor all of my investment choices using the monthly moving average crossover system and the relative strength charts to decide how to allocate my pension assets.
Disclosure: I am/we are long SPY, IWM, AGG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.