My Current View Of The S&P 500 Index: May 2019

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

SPY hits all-time highs, staying in bullish alignment.

All of the equity ETFs I follow for my retirement posted gains in April.

My charts say that investors continue to favor stocks over bonds.

In this month's article, I will state why I am keeping my retirement assets allocated to the equity markets, specifically to SPY, for the month of May. First, let's cover how my strategy fared in April. The stock market continued its rally that started in January. The market, as measured by the S&P 500 index, gained a robust 4.09% in April. As for my pension plan assets, I had a 4.09% return in April due to being 100% allocated in SPY. Consequently, both of my investment objectives were met. I preserved my capital by making money, and I met 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 April, and Table 2 below shows my returns for the past 12 months.

Table 1 - Investment Returns for April

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), 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 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 4.09% in April. SPY closed at an all-time high. The two moving averages are in bullish alignment, and there is growing white space between the two moving averages, which is bullish.

Chart 3 - Monthly IWM with 6/10 Moving Averages

IWM gained 3.33% in April, rebounding after the loss in March. Chart 3 shows that IWM is now in bullish alignment. Let’s look to Chart 4 and 5 to see if money should be allocated to IWM.

Chart 4 - Monthly IWM:SPY Relative Strength

Chart 4 shows the relative strength of IWM compared to SPY. IWM underperformed SPY by 0.66% in April. The relative strength ratio remains inside the downward sloping blue channel - that is bearish. Until this ratio breaks above the channel, I will not hold IWM in my portfolio.

Chart 5 - Monthly EFA with 6/10 Moving Averages

EFA investors received a gain of 2.93% in April. EFA had a bullish breakout from the falling wedge pattern that was discussed last month. Additionally, it is now in a bullish alignment by the slimmest of margins. Chart 6 below will determine if any of my retirement assets will be invested in EFA.

Chart 6 - Monthly EFA:SPY Relative Strength

Chart 6 shows that EFA underperformed SPY by 1.06% in April. This ratio remains in bearish alignment. Consequently, I will not be placing any of my retirement assets in EFA.

Chart 7 - Monthly EFA:IWM Relative Strength

Chart 7 shows that EFA underperformed IWM in April by 0.39%. The EFA:IWM ratio remains inside the green box. The ratio remains in bearish alignment, however. It will take the ratio to break above the green box for a long-term trend that favors small-cap stocks over international stocks to start. I will continue to monitor this ratio.

Chart 8 - Monthly AGG with 6/10 Moving Averages

AGG lost money in April following its strong gain in March. It is in bullish alignment, and the two moving averages are starting to get some separation or white space between them. All of that looks bullish. We will just have to wait and see.

Chart 9 - Monthly AGG:SPY Relative Strength

AGG lost money compared to SPY in April. It underperformed SPY by 4.07%. The two moving averages are still in bearish alignment, and it looks to me that there is a lot of work to do before this relative strength ratio shows bonds leading stocks for a long duration. Until that changes, I will not be invested in AGG.

In summary, SPY was the best-performing ETF in April of those that I follow for my retirement account. Additionally, SPY closed at an all-time high. Chart 9 shows that investors are still preferring equities over bonds for the long term. Because of Chart 9, I am going to allocate my money to either, EFA, IWM, or SPY and not to TLT. All three of the equity ETFs are in bullish alignment, as can be seen by Charts 5, 3, and 2 respectively. To clarify which equity ETF I will invest in, I simply review the relative strength charts. Charts 4 and 6 clearly show that SPY is outperforming IWM (Chart 4) and EFA (Chart 6). Consequently, I will keep my retirement assets allocated to SPY for the month of May. That strategy worked well in April, and I look forward to seeing how it does for the month of May. I will stay 100% allocated to SPY in May.

Disclosure: I am/we are long SPY. 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.