This month's article will outline why I will keep my retirement assets 100% allocated to SPY even though it lost over 6% in May. To recap May, the market, as measured by the S&P 500 index, lost 6.58%. All of those investors who followed the market maxim of "sell in May and go away" should be congratulated. As for my pension plan assets, I had a negative 6.38% return in May due to being 100% allocated in SPY. Consequently, my investment objective of preserving my capital was not met. Furthermore, because I was 100% allocated to SPY, I equaled the return of SPY; neither beating nor trailing the market. Table 1 below shows my returns and allocations for the month of May, and Table 2 below shows my returns for the past 12 months.
Table 1 - Investment Returns for May
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 ETF, 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 six-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 declined 6.38% in May. SPY also had a bearish engulfing candle. As bad as May was for SPY, it remains in bullish alignment. That fact alone will allow me to keep money allocated to SPY in June.
Chart 3 - Monthly IWM with 6/10 Moving Averages
IWM lost 7.85% in May. Chart 3 shows that IWM whipsawed and is now in bearish alignment. That fact alone will keep me out of IWM in the month of June.
Chart 4 - Monthly IWM:SPY Relative Strength
Chart 4 shows the relative strength of IWM compared to SPY. IWM underperformed SPY by 1.58% in May. The relative strength ratio remains inside the downward sloping blue channel. That is bearish. What could be considered bullish is that in previous instances when the ratio reached the bottom of the blue channel, the ratio did rebound. If that trend continues, IWM would outperform SPY next month. I am not going to allocate any money to IWM in June, but a more aggressive trader may at least consider IWM over SPY for the month of June.
Chart 5 - Monthly EFA with 6/10 Moving Averages
EFA lost 5.03% in May. To make matters worse from a technical standpoint, EFA fell back into the wedge pattern outlined in green. Last month, I saw the breakout as bullish. This month, the failed breakout and the bearish engulfing candle are considered bearish. The bullish alignment of the two moving averages is now bearish, reversing last month's position. The bottom line is that EFA is in a bearish alignment and that is enough to keep me out of this position until that changes.
Chart 6 - Monthly EFA:SPY Relative Strength
Chart 6 shows that EFA outperformed SPY by 1.44% in May. This ratio remains in bearish alignment. This ratio also needs to close above the December 2018 high to show a positive trend.
Chart 7 - Monthly EFA:IWM Relative Strength
Chart 7 shows that EFA outperformed IWM in May by 3.06%. The EFA:IWM ratio does remains inside the green box. I would like to see the ratio break above the December 2018 high. If it does that, it is a good first step to reversing EFA's bearish trend compared to IWM. I will continue to monitor this ratio.
Chart 8 - Monthly AGG with 6/10 Moving Averages
AGG had a large move in May rising 1.91%. AGG has performed well since breaking above the green box shown in Chart 8. AGG remains in bullish alignment and the two moving averages have larger white space between them. AGG looks bullish to me.
Chart 9 - Monthly AGG:SPY Relative Strength
AGG outperformed SPY in May by a staggering 8.85%. With such a strong move, the two moving averages are now at the same level. If this ratio goes above the December 2018 high, then perhaps bonds will outperform stocks for the long run. Until that time, I prefer stocks to bonds.
In summary, May was a rough month for investors unless you were invested in AGG. AGG outperformed all of the other investment choices I have in my retirement fund. Chart 2 shows that SPY is in bullish alignment. Charts 3 and 5 show that IWM and EFA respectively are in bearish alignment. That prevents me from allocating any money to those two ETFs. Chart 8 shows that AGG is in bullish alignment, yet Chart 9 shows that AGG has not yet reversed its long-term downtrend against SPY. Consequently, I will continue to allocate 100% of my retirement assets to SPY in the month of June.
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.