The year 2019 started off well for equity investors. All of the indices I follow for my retirement assets posted positive returns in January. Unfortunately, I was in cash and corporate bonds for the month. While they too posted positive gains in January, I underperformed the S&P 500 index. The market, as measured by the S&P 500 index, gained 7.87% in January. As for my pension plan assets, I had a positive 0.57% return in January. 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 SPY by 7.44% in January. Table 1 below shows my returns and allocations for the month of January, and Table 2 below shows my returns for the past 12 months.
Table 1 - Investment Returns for January
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 (NYSEARCA:AGG), SPDR S&P 500 ETF (NYSEARCA:SPY), iShares Russell 2000 ETF (NYSEARCA:IWM), and 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 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
Chart 2 shows that SPY gained 8.01% in January. It remains in bullish alignment by the barest of margins for the second month in a row. As I mentioned last month, Chart 2 actually provides an interesting problem. Chart 1 above shows that $SPX is now in bearish alignment. Its 6-month moving average is below the 10-month moving average. However, the ETF proxy for $SPX, which is SPY, is not quite in bearish alignment. In this case, I will yield to the $SPX chart and consider SPY in bearish alignment, therefore again keeping my money out of SPY in my retirement account.
Chart 3 - Monthly IWM with 6/10 Moving Averages
IWM was the place to put your money last month. Chart 3 shows that IWM gained 11.32% in the month. Congratulations to those of you who allocated some money there. IWM does remain in bearish alignment and that suggests lower prices in the future based on the current trends, so I will not allocate any of my retirement assets to IWM in February.
Chart 4 - Monthly IWM:SPY Relative Strength
Chart 4 shows the relative strength of IWM compared to SPY. In January, IWM outperformed SPY by 3.07%. The ratio remains in a downtrend.
Chart 5 - Monthly EFA with 6/10 Moving Averages
EFA gained 6.63% in January and was the worst-performing equity index I follow. It continues to trend lower as EFA remains in bearish alignment. Since EFA is in a bearish alignment, I won't be allocating any of my retirement assets to EFA in February.
Chart 6 - Monthly EFA:SPY Relative Strength
Chart 6 shows that EFA underperformed SPY by 1.27% in January. This ratio will be monitored moving forward.
Chart 7 - Monthly EFA:IWM Relative Strength
Chart 7 shows that EFA underperformed IWM in January by 4.21%. The EFA:IWM ratio remains inside the green consolidation box. The ratio has spent most of its time over the last several years inside this box. If the ratio can break above the green consolidation box, then EFA may enter a period of long-term outperformance over IWM. I will be watching to see when or if that happens.
Chart 8 - Monthly AGG with 6/10 Moving Averages
Chart 8 shows that AGG marched higher after receiving a buy signal in December. AGG gained 0.91% for the month and broke out of its multi-year consolidation box. The volume for the month remained higher than normal. Compare the volume of AGG to the volume of SPY, IWM, and EFA. While the gains were stronger in the equity indices, the gains were made on lower volume. Perhaps that tells us something. Only time will tell.
Chart 9 - Monthly AGG:SPY Relative Strength
Chart 9 shows that AGG underperformed SPY by 6.57% in the month of January. It looks like the ratio is making a series of higher highs, but it may be too early to tell.
Moving forward I like the breakout of AGG in Chart 8 along with the look of the ratio chart in Chart 9. Consequently, I will allocate 100% of my assets to AGG in February. I consider all of the equity indices to be in bearish alignment, so I will stay out of those. The market has been like a yo-yo the past several months, so I will stay conservative and stick with my trading methodology which prefers bonds over stocks at this time.
Disclosure: I am/we are long AGG. 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.