What a difference a month makes. In October, for the first time since I have been writing this series of articles, all four of the markets I follow were negative. In November, all four of the markets I follow were positive. The market, as measured by the S&P 500 index, closed 1.79% higher in the month. As for my pension plan assets, I had a positive 1.83% return in November. Consequently, my first investment objective, preservation of capital, was achieved. My second investment objective, beating the S&P 500 index as measured by the ETF SPY, was not achieved. My return lagged the SPY by a mere 0.02%. Table 1 below shows my returns and allocations for the month of November, 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
To review the purpose of this series of articles, my retirement account only allows me to buy the following four ETFs: iShares Core Total U.S. Bond Market ETF (AGG), SPDR S&P 500 Trust 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 bounced back in November and posted a gain of 1.85%, which can be seen in Chart 2. SPY remains positive for the year and remains in bullish alignment, as the 6-month moving average is almost 5 points higher than the 10-month moving average. As stated last month, we are now in the seasonally bullish period, so I have confidence we will see higher highs ahead. In the meantime, I will be keeping my eyes open for a moving average crossover indicating that the market has turned bearish.
Chart 3 - Monthly IWM with 6/10 Moving Averages
Chart 3 shows that IWM stabilized a bit in November by gaining 1.73%. That sure beats the approximate 11% loss that was recorded in October. IWM remains in bullish alignment and will remain in my allocation mix for December.
Chart 4 - Monthly IWM:SPY Relative Strength
Chart 4 shows the relative strength of IWM compared to SPY. In November, IWM underperformed SPY slightly by 0.13%. This underperformance is why I underperformed SPY for the month of November. The ratio remains inside the downward sloping channel outlined by the two blue lines. I will continue to monitor this ratio.
Chart 5 - Monthly EFA with 6/10 Moving Averages
Chart 5 shows that EFA stabilized a bit by gaining 0.50% in November. It remains above support that is depicted by the green horizontal line, so that could be considered bullish. However, the bearish alignment that originated in October is still in effect. Consequently, I will not allocate any money to EFA until it goes into bullish alignment. I will continue to monitor the fund.
Chart 6 - Monthly EFA:SPY Relative Strength
Chart 6 shows that EFA underperformed SPY in November by 1.33%. The ratio remains outside of the green consolidation box. Eventually, this ratio will reverse for a long-duration move in which EFA outperforms SPY. A first sign of that would be for the ratio to climb back into the green box. I will continue to monitor this ratio.
Chart 7 - Monthly EFA:IWM Relative Strength
Chart 7 shows that EFA was outperformed IWM by 1.21% for the month of November. After last month, I thought that this ratio might get back into the green box, yet that did not happen. Similar to the analysis of Chart 6 above, for EFA to outperform IWM for the long term, the ratio must first close inside the consolidation box and then continue to move higher. I will continue to monitor this ratio.
Chart 8 - Monthly AGG with 6/10 Moving Averages
Chart 8 shows that AGG bounced back from last month’s decline and climbed 0.52% in November. However, the bearish alignment from last month remains. The fund has flattened out over the past 10 months and remains inside the green consolidation box that it has been in for over 2 years. This consolidation works against trend traders like myself as many whipsaws happen. I will not allocate any money to this ETF in December.
Chart 9 - Monthly AGG:SPY Relative Strength
Chart 9 shows that AGG returned to underperforming SPY in November by 1.31%. This trend has been in place for the past several years. Investors simply prefer equities over bonds and have done so for quite some time. The negative relative strength shown in Chart 9 will keep me out of AGG in December.
For the month of December, I will maintain my allocation of 85% SPY and 15% IWM. December is historically a bullish month. 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, 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.