My Current View Of The S&P 500 Index: March 2020

Summary

• Equity markets sold off sharply.
• An allocation change to 50% SPY and 50% AGG is warranted.
• Have to respect closes above and below the 10 month moving average.

This month's article will outline why I will change my allocation to 50% to the SPDR S&P 500 Trust ETF (SPY) and 50% to the iShares Core U.S. Aggregate Bond ETF (AGG) with my retirement assets in March. First, let me review my performance in February. It was brutal. The market, as measured by the S&P 500 index, lost 8.14%. As for my pension plan assets, I also had a large loss of 7.92% in February which matched the SPY ETF. Consequently, my investment objective of preserving my capital was not met. 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: iShares Core U.S. Aggregate Bond ETF, 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 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 now has back to back monthly losses for the first time since February and March of 2018. SPY lost 7.92% in February. Volume for the month was the most in the past six months. The good news is that SPY remains in bullish alignment and for now the trend of the market is still up. The bad news is a couple of things. First, it appears that a failed breakout has occurred. SPY has closed below the breakout area established last summer marked by the dashed green line on Chart 2. That is a bearish development. Secondly, SPY blew right past the 6 and 10 month moving averages in a bearish manner. A close below the 10 EMA warrants some caution. It doesn't mean that a bear market imminent. It also doesn't mean that it is clear sailing ahead. Because of the failed breakout and the close below the 10 month EMA, I am reducing my allocation to SPY to 50%.

Chart 3 - Monthly IWM with 6/10 Moving Averages

Just as it did in January, IWM was the equity ETF that lost the most percentage wise in February. IWM posted an 8.85% decline on higher volume. IWM remains in bullish alignment but just barely. Small cap stocks may now be forming the handle part of the cup and handle basing formation that was written about in last month's article. See the green line on Chart 3. This formation was made famous by William J. O'Neil of Investor's Business Daily. If IWM is forming this pattern, then the low part of the handle should remain well above the lows established in December 2018.

Chart 4 - Monthly IWM:SPY Relative Strength

Chart 4 shows the relative strength of IWM compared to SPY. IWM underperformed SPY by 1.01% in February. The ratio remains in bearish alignment. As mentioned in previous articles, IWM has steeply underperformed SPY since mid-2018. The dashed green descending trend line on Chart 4 shows this clearly. Signs of potential change in the performance of this ratio would be for the ratio to close above the dashed green trend line or for the ratio to close above the 10 month moving average. Until then I will not allocate any money to IWM.

Chart 5 - Monthly EFA with 6/10 Moving Averages

EFA lost money in February, closing down 7.77%. As mentioned last month, EFA may be forming a cup and handle pattern. The handle part may now be under construction. If so, the low part of the handle should not fall below the lows set in December 2018. The bullish alignment is still intact, but barely. Volume was higher for the month. EFA looks to be under pressure. We will see how it does in the month of March.

Chart 6 - Monthly EFA:SPY Relative Strength

EFA slightly outperformed SPY in March by 0.16% as shown on Chart 6. As stated in previous months, underperformance of EFA to SPY has been going on for a very long time. Since mid-2017, EFA has not been the place to invest money compared to SPY. I will continue to review this ratio looking for the ratio to close above its 10 month moving average. That might be the time to allocate some money to EFA. Until that happens I will avoid allocating money to EFA.

Chart 7 - Monthly EFA:IWM Relative Strength

For the third month in a row EFA outperformed IWM. Chart 7 shows that EFA outperformed IWM by 1.19% in March. The EFA:IWM ratio remains inside the green box but is in bullish alignment meaning that EFA should continue to outperform IWM in the future. I will continue to monitor this ratio.

Chart 8 - Monthly AGG with 6/10 Moving Averages

Chart 8 shows that AGG followed up last month's gain with another strong performance. AGG gained 1.59% in February. Volume was the highest it's been in a year. AGG remains in bullish alignment meaning that higher prices are probable.

Chart 9 - Monthly AGG:SPY Relative Strength

Chart 9 shows that AGG outperformed SPY in February by 10.32%. Congratulations to those of you who had money in AGG. With that gain, the ratio has moved above both the 6 month and 10 month EMAs. That is a bullish development for this ratio. That does not mean that AGG is set to outperform SPY for the long term however. The two moving averages haven't crossed yet so the ratio is not yet in bullish alignment. You can see on Chart 9 several instances last year where the ratio closed above the 6 and 10 month EMAs but did not hold that level. A second development is that the ratio closed above the downward sloping trend line shown by a green dashed line on Chart 9. This indicates strength for the ratio at least in the near term. The trend line breakout and the close above the 10 month EMA indicate that AGG may have some near-term strength over SPY. At this time I will allocate 50% of my money to AGG.

In summary, equity markets sold off considerably in February 2019. IWM, SPY, and EFA all declined sharply. SPY has now declined for two consecutive months. SPY has closed below the 10 month EMA. This development along with an indication of a failed breakout warrants some caution. AGG did well by gaining 1.59%. The AGG:SPY ratio made huge gains by closing above its 6 and 10 month moving averages. However, the AGG:SPY ratio remains in bearish alignment. The AGG:SPY ratio also broke above a downward sloping trend line. These two developments are bullish at least for the short term. Due to this month's developments, I feel some caution is warranted. I will reduce my exposure to SPY from 100% to 50%. I will increase my exposure to AGG from 0% to 50%. I just think it is prudent to respect the closes below the 10 month EMA in SPY and above the 10 month EMA in the AGG:SPY ratio. Who knows what March will hold for the markets? I will be disciplined and stay with the rules of my system. That may not lead to a profitable March, but I feel confident it will lead to a profitable retirement fund over the long term.

Analyst’s 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.

I will go long AGG on March 2nd in addition to holding SPY