A small gain for the market in August.
There is an indecision candlestick to consider.
Bonds were the strong performer in August.
The market, as measured by the S&P 500, was essentially flat for the month of August. The SPDR S&P 500 ETF (SPY) gained just 0.29% for the month, but it was a gain. As for my pension plan, I too was able to manage a gain. Consequently, my first investment goal of preservation of capital was achieved. Unfortunately, my goal of beating the S&P 500 index as measured by SPY 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 August
Table 2 – Investment Returns 12 Months
To review, my retirement account only allows me to buy the following four ETFs: the iShares Core U.S. Aggregate Bond ETF (AGG), the SPDR S&P 500 ETF, the iShares Russell 2000 ETF (IWM), and the 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 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 S&P 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.
To me, the last place you want to experience a large drawdown is in your pension plan. During the 2008-2009 market crash, many people didn't even look at their retirement statements because they were afraid of what they would see. I submit that if those people would have used a market strategy similar to what I outline in this series of articles, they would have been able to avoid much of the decline and consequently would have had less emotional stress during that time period.
I find this investment strategy to be particularly useful for managing the assets in my pension plan. If your pension plan is anything like mine, then you just have a choice of ETFs or mutual funds to select from. Looking at standard fundamental criteria such as P/E ratios, free cash flow, dividend yield, and the like is not easily applied to stock indices and mutual funds. What is easily applied to stock indices and mutual funds is trend following technical analysis as I show in this article and other previously published articles on SA like this one last week.
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
As mentioned above, SPY managed a small gain. As I mentioned last month, the summer months are thought to be weak performing months. The monthly candlestick is a doji meaning that there was indecision amongst the traders in SPY for market direction. Obviously, the future direction is uncertain but my system says to stay bullish as the moving averages are in bullish alignment.
Chart 3 – Monthly IWM with 6/10 Moving Averages
IWM declined 1.26% for the month. Even though IWM declined in price, IWM remains in bullish alignment.
Chart 4 – Monthly IWM:SPY Relative Strength
Chart 4 shows the relative strength of IWM to SPY. A long-term view of Chart 4 shows that IWM, while having bouts of outperformance against SPY, is clearly in a downtrend. The ratio has made a series of lower highs and lower lows. The ratio most recently peaked in December 2016 and has essentially fallen ever since. This is not to say that investors in IWM have lost money. Chart 3 above shows that IWM has advanced. It just has not advanced as much as the S&P 500 index since December 2016. August saw IWM again underperform SPY this time by 1.55%.
Chart 5 – Monthly EFA with 6/10 Moving Averages
EFA also declined for the month of August, losing 0.04%. Like IWM, EFA remains in bullish alignment.
Chart 6 – Monthly EFA:SPY Relative Strength
Chart 6 shows that EFA underperformed SPY in August by 0.34%.
Chart 7 – Monthly EFA:IWM Relative Strength
Chart 7 shows that EFA:IWM ratio and the 6 and 10-month moving averages are all trending higher and are now in bullish alignment. The next step is still to move above the May high.
Chart 8 – Monthly AGG with 6/10 Moving Averages
AGG is where the money was made in August. It remains in a bullish alignment and closed 0.94% higher for the month of August.
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 August, I was allocated 75% EFA and 25% SPY. Because the EFA:SPY and EFA:IWM relative strength ratios both have upward sloping moving averages, I will continue to allocate my assets in the same manner for September.
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.