This month’s article will outline why I will maintain my allocation of 25% to the SPDR S&P 500 Trust ETF (SPY) and 75% to the iShares Core U.S. Aggregate Bond ETF (AGG) with my retirement assets in May. First, let me review my performance in April. Money was made in April. The market, as measured by the S&P 500 index, rallied substantially gaining 12.68%. As for my pension plan assets, I had a modest gain of 4.47% in April, underperforming the SPY ETF. My investment objective of preserving my capital was met, yet I did not beat the overall market as measured by the S&P 500 index. 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, the SPDR S&P 500 ETF, 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 S&P 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 rebounded sharply in April, rising 12.70%. The gain did take place on lower volume and SPY is in bearish alignment. Even with the strong rally, SPY didn’t close above its 6- or 10-month EMA, nor did it close above the dashed green line which represents the failed breakout line set late last year. The question remains, was this month’s rally a snap-back rally and lower prices are expected or is the low for this event in already? I don’t know. I am simply trying to be in alignment with the market as time goes on. Based on what I see, I will keep my allocation to SPY at 25%.
Chart 3 – Monthly IWM with 6/10 Moving Averages
IWM was the place to be invested in April. Congratulations to those of you who had your money there. IWM had an impressive 13.85% rally, albeit on lower volume. Like SPY, IWM remains in bearish alignment. It did not close above either of its moving averages.
Chart 4 – Monthly IWM:SPY Relative Strength
Chart 4 shows the relative strength of IWM compared to SPY. IWM outperformed SPY by 1.02% in April. Despite that performance, this ratio remains in bearish alignment. I will refrain from allocating money to IWM until I see further signs of outperformance. Such signs include the ratio rising above the downward sloping dashed green line or the ratio closing above the 10-month moving average. There is still work to be done on this ratio before I allocate money to IWM.
Chart 5 – Monthly EFA with 6/10 Moving Averages
Chart 5 shows that EFA had a solid gain of 5.82% which occurred on lower volume. All of ETFs mentioned in this article had lower volume for the month of April. EFA remains in bearish alignment. EFA also failed to close above either of its moving averages.
Chart 6 – Monthly EFA:SPY Relative Strength
Chart 6 continues to show the underperformance of EFA to SPY. This trend is now two years old. As I have said in previous months, I will not allocate money to EFA until this ratio turns around. I will continue to review this ratio looking for the ratio to close above its 10-month moving average.
Chart 7 – Monthly EFA:IWM Relative Strength
EFA underperformed IWM for the first time in a few months. That underperformance brought the ratio back inside the green box. It looks like last month was a false breakout. I will continue to monitor this ratio.
Chart 8 – Monthly AGG with 6/10 Moving Averages
In April, AGG had a solid return of 1.72% on lower volume. AGG remains in bullish alignment and closed at a new high. I will continue to have most of my money allocated to AGG.
Chart 9 – Monthly AGG:SPY Relative Strength
Chart 9 shows that AGG drastically underperformed SPY in April by 9.74%. The ratio is in bullish alignment and the ratio remains above the two rising moving averages. Last month, the ratio closed higher than it has in over two years. Consequently, a higher high is now in place. Now, I am looking to see if this ratio can stay above the lows set late in 2019. For the long-term bullish trend to be in place, you need to see a series of higher highs and higher lows. If we see that, it would indicate that equities are underperforming bonds for quite some time. At this time, Chart 9 tells me that I need to keep more than half of my money in AGG versus SPY.
To summarize, April saw every ETF I monitor rise on lower volume. Equities did very well. Even with the rally, every equity ETF remains in bearish alignment and none of the equity ETFs closed above one of their moving averages. AGG is the only ETF I monitor that is in bullish alignment. There will be no changes to my allocation this month. I like the idea of having some exposure to equities in case the rally continues. Perhaps it will continue to rally due to the economy opening up, the Fed providing liquidity, stimulus from the government, or good news on a cure or vaccine. In the event the markets decline in May, I will maintain my 75% allocation to AGG. It appears to me that we continue to be in the midst of a bear market. As I stated earlier, I don’t know what to expect. I try not to predict what I think will happen. I just want to be properly aligned with the market as I see it in the charts.