We are in the seasonally bullish period for equities and they performed well.
No changes to allocations will be made for December.
All four of the positions I monitor are in bullish alignment.
This month’s article will outline why I will maintain a 100% allocation to SPY with my retirement assets. There will be no changes to my retirement allocations in December as we are in the seasonally bullish period for stocks. First, let me review my performance in November. The market, as measured by the S&P 500 index, had an outstanding gain of 3.40%. As for my pension plan assets, I was also positive with a return of 3.62% matching the SPY ETF. Consequently, my investment objective of preserving my capital was met. Table 1 below shows my returns and allocations for the month of November and Table 2 below shows my returns for the past 12 months.
Table 1 – Investment Returns for November
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
SPY gained 3.62% higher in November and closed at a new high. It remains in bullish alignment and the white space between the two moving averages increased for the month. One critique of the recent two-month move in SPY is that the last two months had light volume. As I stated last month, I like the fact that SPY is at all-time highs and is in bullish alignment. I will keep 100% of my retirement funds allocated to SPY for December as we are now in the seasonally bullish period for stocks.
Chart 3 – Monthly IWM with 6/10 Moving Averages
IWM was strong in November gaining 4.07%. It was the best performing equity position I monitor for my retirement assets. IWM is in bullish alignment and it is heading for new highs. IWM will be a position to watch now that we are in the seasonally bullish period of the year.
Chart 4 – Monthly IWM:SPY Relative Strength
Chart 4 shows the relative strength of IWM compared to SPY. IWM outperformed SPY by a modest 0.43% in November. The ratio is trying to enter the downward sloping channel that I have been monitoring for a couple of years. Nothing has changed in my analysis of this ratio. The ratio needs to start making a series of higher highs and higher lows before I will be convinced that IWM will outperform SPY for a sustained period of time. Until then, there will be no money allocated to IWM.
Chart 5 – Monthly EFA with 6/10 Moving Averages
EFA was higher in November by 1.13%. It was up which is good, yet it underperformed the other two equity positions that I follow. EFA remains in bullish alignment and EFA is approaching new highs. I will continue to monitor this ETF.
Chart 6 – Monthly EFA:SPY Relative Strength
Chart 6 shows that EFA underperformed SPY in November by 2.41%. Chart 6 shows the long-term weakness that EFA has had compared to the S&P 500 index. Domestic equities have been stronger than international equities. At some time, that trend will reverse. When that happens hopefully I will recognize it and will 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 underperformed IWM by 2.82% in November. The EFA:IWM ratio remains inside the green box and hasn’t made much progress all year. 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 fell a minor amount in November, closing down 0.03%. It appears that AGG is consolidating as the last 3 months have shown little progress. AGG remains in bullish alignment.
Chart 9 – Monthly AGG:SPY Relative Strength
Chart 9 shows that AGG underperformed SPY by a large margin of 3.53% in November. Nothing has changed from my previous analysis of this ratio. The ratio hasn’t moved much in the past year and a half. That is why I haven’t allocated money to AGG. 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, equity markets went higher and bonds declined slightly. IWM was the star performer but is still in a long-term downtrend versus SPY. EFA was higher and lagged IWM and SPY. All four ETFs that I monitor for my retirement assets are in bullish alignment. As for my retirement assets, I had a good month, with my position climbing 3.62% in November. I was 100% allocated to SPY in November and I will stick with that allocation in December. Enjoy the Holidays everyone.
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.