The stock market continued its rally from January. The market, as measured by the S&P 500 index, gained 2.97% in February. As for my pension plan assets, I had a negative 0.11% return in February due to being 100% allocated in AGG. Consequently, both of my investment objectives were not met. I neither preserved my capital nor did I meet the second investment objective which is beating the S&P 500 index as measured by the ETF SPY. Table 1 below shows my returns and allocations for the month of February 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: the iShares Core U.S. Aggregate Bond ETF (AGG), the SPDR S&P 500 ETF (SPY), the iShares Russell 2000 ETF (IWM), and the 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
Chart 2 shows that SPY gained 3.24% in February. Both SPY and $SPX are in bullish alignment. Therefore, I will allocate my retirement assets to SPY in March.
Chart 3 – Monthly IWM with 6/10 Moving Averages
IWM had another strong month closing 5.18% higher in February. Even with the strong performance, IWM remains in bearish alignment. Again, I will not allocate any of my retirement assets to IWM in March.
Chart 4 – Monthly IWM:SPY Relative Strength
Chart 4 shows the relative strength of IWM compared to SPY. IWM outperformed SPY by 1.88% in February. The ratio remains in the downward sloping channel. Another positive month of outperformance may lead to the ratio breaking above the channel outlined in blue.
Chart 5 – Monthly EFA with 6/10 Moving Averages
EFA gained 2.54% in February. EFA has rallied back into the falling wedge outlined in green. The falling wedge is considered to be a bullish continuation pattern. I will be observing EFA to see if it can break above the falling wedge pattern in upcoming months. EFA remains in a bearish alignment and I will not be allocating money to EFA in March.
Chart 6 – Monthly EFA:SPY Relative Strength
Chart 6 shows that EFA underperformed SPY by 0.68% in February. This ratio remains in bearish alignment and will be monitored moving forward.
Chart 7 – Monthly EFA:IWM Relative Strength
Chart 7 shows that EFA underperformed IWM in February by 2.51%. The EFA:IWM ratio has again fallen below the green consolidation box. Small-cap stocks are outperforming international stocks. The ratio remains in bearish alignment.
Chart 8 – Monthly AGG with 6/10 Moving Averages
Chart 8 shows that AGG formed a doji candlestick. A doji candlestick indicates indecision. Essentially, AGG closed the month where it started. AGG lost 0.11% for the month and remains above the multi-year consolidation box outlined in green. Volume retreated from the previous two months. It will be interesting to see if AGG remains above the box or if it retreats back into the consolidation area. Only time will tell.
Chart 9 – Monthly AGG:SPY Relative Strength
Chart 9 shows that AGG underperformed SPY by 3.25% in the month of February. The ratio has fallen two months in a row as equities have rallied.
Due to Chart 2 now being in bullish alignment, I will now allocate all of my retirement assets to SPY. Even though AGG is also in bullish alignment as shown in Chart 8, Chart 9 shows that SPY has consistently been outperforming AGG over the long term. That is why I will allocate 100% of my money to SPY in March.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SPY over the next 72 hours. 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.