My Current View Of The S&P 500 Index - July 2017 Edition

Summary

• One of two investment objectives met in June.
• Equity markets continue to advance.
• Relative strength ratios are at cross roads.

The market, as measured by the SP 500, eked out a gain in the month of June. As for my retirement account I was able to manage a small gain. Consequently, my first investment goal of preservation of capital was achieved. Unfortunately, my goal of beating the SP 500 index as measured by the SPY ETF, was not achieved. Table 1 below shows my return for the month and Table 2 below shows my returns for the past 12 months.

Table 1 – Investment Returns for June

Table 2 – Investment Returns 12 Months

To review, 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 (NYSEARCA:SPY), iShares Russell 2000 ETF (IWM), and iShares MSCI EAFE ETF (EFA). I can also have my money in cash.

I use my moving average crossover system combined with relative strength charts to determine how to allocate my retirement assets. My moving average crossover system uses the 6 month and 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 SP 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 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.

The following charts show the current status of the ETFs I am allowed to buy in my retirement account.

Chart 2 – Monthly SPY with 6/10 Moving Averages

SPY is in a strong bullish uptrend as it continues to move higher. The summer months are often thought to be poor performing months for stocks but my trading systems says to stay invested as SPY is in bullish alignment.

Chart 3 – Monthly IWM with 6/10 Moving Averages

IWM rebounded nicely as it gained 3.37% for the month and closed at a new high. Chart 3 remains in bullish alignment.

Chart 4 – Monthly IWM:SPY Relative Strength

Chart 4 shows the importance of relative strength. Since early 2016 IWM has outperformed SPY meaning that an investor would have made more money investing in IWM as opposed to investing in SPY since early 2016. However, since the beginning of 2017, IWM has under performed SPY. June saw IWM make a nice comeback as it outperformed SPY by 2.72%. Looking at Chart 4 from a longer term viewpoint shows that IWM has under performed SPY since August 2013. See the red arrows showing a series of lower lows indicating a downtrend. The moving averages show that IWM:SPY is in bullish alignment meaning that positive outcomes are probable. Ideally, I’d like to see the ratio move above the December 2016 point to signify that the IWM:SPY long term trend has changed.

Chart 5 – Monthly EFA with 6/10 Moving Averages

EFA had a modest gain of 0.30% for the month. EFA is in bullish alignment and closed at a new high.

Chart 6 – Monthly EFA:SPY Relative Strength

Chart 6 shows that the relative strength of EFA versus SPY lost ground in June as EFA underperformed by 0.34%. Last month I increased my allocation to EFA to 75% of my assets. This underperformance is the reason I failed in June to achieve my second investment objective of beating the SP 500 index

Chart 7 – Monthly EFA:IWM Relative Strength

Chart 7 shows that EFA:IWM ratio and the 6 and 10 month moving averages are all at the same place. Right now the two moving averages are still trending higher which is what needs to happen before the go into bullish alignment.

Chart 8 – Monthly AGG with 6/10 Moving Averages

AGG remains in a bullish alignment, but closed lower for the month of June.

Chart 9 – Monthly AGG:SPY Relative Strength

AGG continues to be outperformed by SPY. Due to this underperformance I will not be allocating any of my retirement assets to AGG.

For the month of June I was allocated 75% EFA and 25% SPY. I will continue to allocate my assets in the same manner for July. I will be paying attention to Charts 3, 4, 5, 6, and 7 for allocation changes as the relative strength charts are at cross roads.

Analyst’s Disclosure: I am/we are long SPY, EFA. 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.