- February saw a correction in all of the indices I follow.
- Defensive bonds even lost money.
- Equity indices remain in bullish alignment.
The long sought after correction finally came, or it at least began. All of the indices that I monitor corrected in February. It is fair to say that those indices rebounded from their lows during the month as well, but they all closed lower for the month. The market, as measured by the S&P 500 index, closed 3.89% lower in February. The SPDR S&P 500 ETF (SPY) lost 3.64% for the month. As for my pension plan assets, I lost money in February. Consequently, my first investment goal, preservation of capital, was not achieved. Unfortunately, I did not beat the returns of the S&P 500 index as measured by SPY. So neither of my investment objectives were met for the month of February. 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 February
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: 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 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.
I employ this strategy because I do not want to experience a large drawdown with my pension assets. 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.
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 lost 3.64% in the month of February. It was the first monthly lost in over a year. 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 closed lower in February by 3.84%. IWM remains in bullish alignment, indicating the high probability that IWM moves higher from here.
Chart 4 - Monthly IWM:SPY Relative Strength
Chart 4 shows the relative strength of IWM compared to SPY. Essentially, IWM has underperformed SPY since late 2016. That trend continued in February as IWM did underperform SPY by 0.22%, but the IWM:SPY ratio remained above the downward sloping blue trend line. As mentioned in last month's article, once the IWM:SPY ratio closes above the highs made in December 2016, then IWM may enter a period of sustained out performance compared to SPY. Until then I will keep my allocation to IWM under 50%.
Chart 5 - Monthly EFA with 6/10 Moving Averages
In February, EFA gave up some of the big gain it had in January, closing down 4.83%. 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 1.24% in February. The EFA:SPY ratio 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. A bullish trend change would be in place if the EFA:SPY ratio rose above the highs it made in July, 2017. Until then, I will keep my allocation to EFA under 50%.
Chart 7 - Monthly EFA:IWM Relative Strength
Chart 7 shows that EFA underperformed IWM by 1.03% in February. I am still waiting for the EFA:IWM ratio to close above the highs made earlier in 2017. If that happens a trend change could be in place indicating sustained outperformance of EFA compared to IWM. If that takes place I would allocate more money to EFA compared to IWM.
Chart 8 - Monthly AGG with 6/10 Moving Averages
Chart 8 shows that AGG investors lost money in February as AGG closed down 1.01%. AGG does remain is bullish alignment, just barely, but readers can see that the two moving averages are sloping downward. If you are invested in AGG the moving average crossover strategy is still long AGG even though the two moving averages are now trending lower. This is similar to the June, 2015 time period shown in Chart 8.
Chart 9 - Monthly AGG:SPY Relative Strength
While Chart 8 shows that AGG is in bullish alignment, Chart 9 shows why I do not have any money allocated to AGG. Simply put, this is an equity bull market and equities have vastly outperformed bonds. AGG continues to underperform SPY and you can see that the ratio closed at a new low in January, but it closed slightly higher in February.
For the month of March I will maintain my allocation of 60% SPY, 20% IWM, and 20% EFA. All three of those ETFs are in bullish alignment and the current trends are strong. Even though the market pulled backed in February I believe that my moving average crossover system has me in good position to take advantage of the current bull market that I expect to continue. Remember that following the moving average crossover system is designed to keep me trading with the major trend. I simply need to read the charts to determine what the consensus is of all market participants and then invest accordingly.
This article was written by
Analyst’s Disclosure: I am/we are long SPY, IWM, 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.
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