This bull market continues to march higher. The market, as measured by the SP 500 index, was up again in November and closed 2.81% higher. The SPDR S&P 500 ETF (SPY) gained 3.06% for the month. As for my pension plan assets I too gained for November. Consequently, my first investment goal, preservation of capital, was achieved. Unfortunately, I did not beat the returns of the SP 500 index as measured by SPY. So only half of my investment objectives were met for the month of November. 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 November
Table 2 - Investment Returns Last 12 Months
Looking at Table 2 above there is a lot of red in the difference column showing that I have underperformed, consistently, the SPY return. I have had commenters of my articles suggest that trying to best the SP 500 index is not a necessary goal to have. They state that just beating inflation is all an investor needs to do. I understand their argument, but I will continue to measure my results against the well-known market index. Another aspect of my approach to consider is that the results have to be measured over the entire market cycle which includes a bear market. As I discuss further below, not being in the market during a prolonged decline should allow my system to make up for some of the underperformance I am currently experiencing. Being in cash while the market is declining gives me a positive difference compared to the return of SPY.
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 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 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 PE 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
SPY was the leading performer as measured by the ETFs I can purchase in my retirement plan. In November SPY was up 3.06%. Looking at Chart 2 you can see the strong uptrend that is in place since the last buy signal was given. The trend has been easy to follow since the buy signal and that is the idea. Trend following is meant to be easy and profitable.
Chart 3 - Monthly IWM with 6/10 Moving Averages
Chart 3 shows that IWM gained just shy of 3% for the month and closed at a new high up 2.94% in November. Of course IWM remains in bullish alignment.
Chart 4 - Monthly IWM:SPY Relative Strength
Chart 4 shows that even with IWM's big gain in November it still underperformed SPY albeit just not by much. In November, IWM underperformed SPY by 0.11%. While I am disappointed that I underperformed SPY this month it is hard to be disappointed with my allocation to IWM gaining 2.94%. As for the ratio itself, I would like to see it move above the recent highs it made in December, 2016. I will continue to monitor this ratio and to allocate money to IWM.
Chart 5 - Monthly EFA with 6/10 Moving Averages
EFA had a positive month and closed 0.69% higher. EFA remains in a bullish alignment as the 6 month moving average is higher than the 10 month moving average while both moving averages are sloping higher.
Chart 6 - Monthly EFA:SPY Relative Strength
Chart 6 shows that EFA underperformed SPY by over 2%. The ratio of EFA to SPY appears to be rolling over as the 6 month moving average and the 10 month moving average are now sloping downward meaning that the ratio is not in bullish alignment.
Chart 7 - Monthly EFA:IWM Relative Strength
The EFA:IWM ratio is slowly rolling over. EFA underperformed IWM by over 2% in November. The 6 month moving average and the 10 month moving average are even and are now sloping downward. In recent months I have decreased my allocation to EFA and I will do so again this month because of Charts 6 and 7.
Chart 8 - Monthly AGG with 6/10 Moving Averages
AGG lost money in November but remains in bullish alignment.
Chart 9 - Monthly AGG:SPY Relative Strength
AGG continues to underperform SPY and you can see that the ratio closed at a new low in November. This is a risk on market as investors prefer stocks over bonds. This simple ratio confirms that equities continue to be the place to put your money.
For the month of November I was allocated 50% EFA, 25% IWM and 25% SPY however, I will change that allocation to 50% SPY, 30% IWM, and 20% EFA for the month of December. All three of those ETFs are in bullish alignment and the current trends are strong. My moving average crossover system has me properly aligned and I will continue to monitor the charts.
Disclosure: I am/we are long IWM, EFA, SPY. 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.