My trading system met both of its objectives in September.
Small caps had a great month in September.
An allocation change is made for October.
The market, as measured by the S&P 500 index, was strong in September and closed up 1.93%. The SPDR S&P 500 Trust ETF (NYSEARCA:SPY) gained 2.01% for the month. As for my pension plan assets, I too was able to manage a gain. Consequently, my first investment goal of preservation of capital was achieved. Additionally, I beat the returns of the S&P 500 index as measured by SPY. Consequently, both of my investment objectives were met in September. 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 September
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: the iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG), the SPDR S&P 500 Trust ETF, the iShares Russell 2000 ETF (NYSEARCA:IWM), and the iShares MSCI EAFE ETF (NYSEARCA: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 fund 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 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.
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 find. 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 during the bear market, 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, than 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.
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 in the opening paragraph, SPY was up for the month of September, gaining 2.01%. Last month, I mentioned the indecision candlestick in August but reminded readers that my moving average crossover system indicated to remain bullish. SPY remains in bullish alignment entering the seasonally bullish last quarter of the year.
Chart 3 - Monthly IWM with 6/10 Moving Averages
Well, Chart 3 shows where the money was made in September. IWM gained a stellar 6.30% for the month and closed at a new high. IWM remains in bullish alignment. Since the buy signal was generated in August 2016, IWM has gained just over 24%. Not bad.
Chart 4 - Monthly IWM:SPY Relative Strength
Chart 4 shows that IWM outperformed SPY by a hefty 4.20% in the month of September. If the ratio can take out the highs of last December, then the downtrend in the ratio that was discussed last month will have reversed. The ratio would then have a higher high after a higher low. I am encouraged by the ratio closing above its June close. Since the markets are entering their best seasonal period and the ratio closed above its June close, I will allocate some money to IWM in October.
Chart 5 - Monthly EFA with 6/10 Moving Averages
EFA had a strong month and closed up 2.36%. It closed at a new high in September and remains in bullish alignment.
Chart 6 - Monthly EFA:SPY Relative Strength
Chart 6 shows that EFA minimally outperformed SPY in September by 0.34%. The ratio remains in bullish alignment.
Chart 7 - Monthly EFA:IWM Relative Strength
The EFA:IWM ratio could be rolling over. EFA underperformed IWM considerably, and the ratio closed below its June price. Last month, the 6-and 10-month moving averages moved into a bullish alignment and it remains in bullish alignment, but both moving averages are sloping downward.
Chart 8 - Monthly AGG with 6/10 Moving Averages
AGG gave up half of its gains from August as it closed down 0.57%. The bond fund does remain in bullish alignment.
Chart 9 - Monthly AGG:SPY Relative Strength
AGG continues to be outperformed by SPY, and the ratio closed at a new low in September. This simple ratio confirms that equities continue to be the place to put your money. Again this month, there will be none of my retirement assets allocated to AGG.
For the month of September, I was allocated 75% EFA and 25% SPY, but I will make changes for the month of October. I will allocate 25% to IWM, 25% to SPY, and the remaining 50% to EFA. The allocation to IWM is based on the recent strength seen in Chart 4.
Disclosure: I am/we are long SPY, EFA, IWM. 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.