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

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

An allocation change will be made for September.

IWM underperformed in August.

AGG is at all-time highs.

My Current View of the S&P 500 Index: September 2019

This month's article will outline why I will change my allocation in my retirement assets. For September, I will allocate 100% of my money to SPY. Recapping August, the market, as measured by the S&P 500 index, lost 1.81% in August. As for my pension plan assets, I had a negative return of 2.49% return in August. My 25% allocation to IWM in August caused the underperformance to the S&P 500 index. Consequently, my investment objective of preserving my capital was not met. Table 1 below shows my returns and allocations for the month of August, and Table 2 below shows my returns for the past 12 months.

Table 1 - Investment Returns for August

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 (AGG), SPDR S&P 500 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

SPY closed down 1.67% in August, which caused my overall return to be negative for the month. Last month, I commented that the July candlestick was not one that was particularly bullish and sure enough, SPY declined in August. The good news is that SPY is just off of its all-time highs and is in bullish alignment. That is enough to keep me allocated to SPY for the month of September.

Chart 3 - Monthly IWM with 6/10 Moving Averages

IWM had the largest decline of all the ETFs I follow for my retirement funds. In August, IWM declined 4.93%. It is now in bearish alignment. Looking a Chart 3, you can see that IWM has just consolidated over the past two years. It is essentially at the same price it was back in late 2017. My attempt to gain an advantage by putting some of my assets into IWM failed. In September, I will have no allocation to IWM.

Chart 4 - Monthly IWM:SPY Relative Strength

Chart 4 shows the relative strength of IWM compared to SPY. IWM underperformed SPY by 3.31% in August. As I mentioned in the previous paragraph, my attempt to gain an advantage by buying IWM at the bottom of the channel outlined in blue in Chart 4 failed. IWM continues to be outperformed by SPY. There will be no money allocated to IWM in September.

Chart 5 - Monthly EFA with 6/10 Moving Averages

August was a negative month for EFA, just like all of the equity ETFs that I follow for my retirement fund. Chart 5 shows that EFA lost 1.92% in August. The bullish alignment is barely hanging on as the 6-month moving average is just above the 10-month moving average. Another bullish sign is that EFA is still above the wedge pattern outlined in green.

Chart 6 - Monthly EFA:SPY Relative Strength

Chart 6 shows that EFA underperformed SPY in August by 0.25%. Chart 6 shows the long-term weakness that EFA has had compared to the S&P 500 index. At some time, that trend will reverse. When that happens, hopefully, I will recognize it and be able to take advantage of it. As for now, no money will be allocated to EFA.

Chart 7 - Monthly EFA:IWM Relative Strength

Chart 7 shows that EFA handily outperformed IWM in August by 3.16%. The EFA:IWM ratio does remain 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 continues to perform well. It rose 2.78% and was easily the best performing EFT that I follow for my retirement assets. Unfortunately, I didn't have any money allocated to AGG last month. AGG remains in bullish alignment.

Chart 9 - Monthly AGG:SPY Relative Strength

Chart 9 shows that AGG outperformed SPY by 4.53% in August. However, that same chart shows that this ratio hasn't done much for the past 18 months or so. Again, 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, August was a step backward for my retirement account. What was especially negative was my 25% allocation to IWM which ended up being the worst performing ETF that I follow. AGG was the best performing ETF in August. AGG is at all-times highs, and SPY is just off of its all-time highs. For September, I will allocate 100% of my assets to SPY. SPY is still in bullish alignment, and SPY has better relative strength compared to IWM, EFA, and AGG.

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.