My Current View Of The S&P 500 Index: July 2018

Includes: AGG, EFA, IWM, SPY
by: Walter Zelezniak Jr

Bull market continues.

International stocks continue to struggle.

My allocations are changing for July.

The markets were mostly positive in June. The month of June was barely positive for my retirement account but not positive for all of the ETFs that I follow as will be shown below. The market, as measured by the S&P 500 index, closed 0.48% higher in June. As for my pension plan assets, I had a positive return in June. My first investment objective, preservation of capital, was achieved with my positive return of 0.15% on my assets. My second investment objective, beating the S&P 500 index as measured by the ETF SPY, was not accomplished as SPY bested my return by 0.42%. Table 1 below shows my return for the month of June and Table 2 below shows my returns for the past 12 months.

Table 1 - Investment Returns for June

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 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.

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

Investors in SPY received a gain of 0.57% in June. SPY has now had three consecutive months of positive gains and remains in bullish alignment. The chances of SPY reaching a new high remain strong. The strong trend in large-cap US equities is still in place, and I will continue to follow that trend by maintaining my position in SPY.

Chart 3 - Monthly IWM with 6/10 Moving Averages

As Chart 3 shows, IWM had a small gain of 0.61%. IWM is at a new high, and it remains in bullish alignment.

Chart 4 - Monthly IWM:SPY Relative Strength

Chart 4 shows the relative strength of IWM compared to SPY. In June, IWM outperformed SPY by 0.04%. The two were essentially even in June. The IWM:SPY ratio has bullishly broken out of the downward sloping channel outlined in blue. If the ratio rises above the previous high set in late 2017, then maybe IWM will have reversed its long-term downtrend and enter a period of sustained outperformance over SPY. Only time will tell. In the meantime, I will keep my allocation to IWM at 20%.

Chart 5 - Monthly EFA with 6/10 Moving Averages

Of the ETFs that I follow for my retirement assets, EFA was the only one to lose money in June. EFA declined 1.58% for the month. This decline contributed to the underperforming SPY for June. In June, not only did EFA lose money, it also closed below its 10-month moving average for the first time since November 2016. EFA remains in bullish alignment.

Chart 6 - Monthly EFA:SPY Relative Strength

Chart 6 shows that EFA underperformed SPY by 2.15% in June. If the ratio climbs above the highs made last July, then a sustained period of EFA outperforming SPY may be a distinct possibility. On the flip side, if the ratio falls below the lows made in early 2017, then EFA may continue to underperform SPY for some time to come. The moving averages are trending lower. Because this ratio closed below the bottom of the box, I will lower my allocation to EFA.

Chart 7 - Monthly EFA:IWM Relative Strength

Chart 7 shows that EFA underperformed IWM by a whopping 2.19% for the month of June. The green box in Chart 7 shows the trading range that the EFA:IWM ratio is in. The ratio has basically traded in a sideways pattern where neither EFA nor IWM investors have significantly outperformed the other. For June, the ratio dropped below the bottom of the box. It will be interesting to see how the ratio performs moving forward. As I said last month, if the ratio moves below the box, I will allocate less money to EFA. I will continue to watch the ratio and adjust my allocation accordingly.

Chart 8 - Monthly AGG with 6/10 Moving Averages

Chart 8 shows that AGG gained slightly in the month of June as AGG gained 0.10%. While positive for the month, Chart 8 shows that AGG remains in bearish alignment. Because AGG is in bearish alignment, I will not be allocating any money to this ETF.

Chart 9 - Monthly AGG:SPY Relative Strength

Chart 9 shows that AGG underperformed SPY in June by 0.47%. Chart 9 shows that equities have outperformed bonds for a period of several years. The bearish alignment identified in Chart 8 and the negative relative strength shown in Chart 9 will keep me out of AGG in July.

For the month of July, I will change my allocation to 70% SPY, 25% IWM, and 5% EFA. I am confident that my investment strategy 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.

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.