- SPY remains in a bullish uptrend.
- My allocation remains unchanged.
- A bonus chart showing S&P 500 monthly returns is added.
In this month's article I will outline why I will maintain my 100% allocation to the SPDR S&P 500 ETF (SPY) in November. First let me review my pension plan performance in October. The market, as measured by the S&P 500 index, gained a robust 6.91%. As for my pension plan assets, I slightly outperformed the index by gaining 7.02% for the month. My investment objective of preserving my capital was met. I did meet my second investment objective which is beating the S&P 500 index. Table 1 below shows my returns and allocations for the month of October and Table 2 below shows my returns for the past 12 months.
I have made changes to Table 2 below after I received a comment from a reader. Table 2 shows new columns to better (more accurately) reflect my investment results. The third column, $100K Hypo, is what my returns would be if I started my account with $100,000 in my first article of this series and followed the allocation recommendations from my articles. The fifth column, $100K SPY, shows the returns of just investing $100,000 and keeping it all allocated to SPY. The percentage returns in the last row show that my strategy returned just under 34% for the last 12 months and simply investing in SPY would have returned just over 31% for the last 12 months. Therefore, I have outperformed SPY for the last 12 months by almost 3.00%.
Table 1 - Investment Returns for October
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, 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 reservation.
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 gained 7.02% in October. That is quite a bullish move. SPY is at all-time highs. SPY is in bullish alignment and it is easy to see the strong uptrend. SPY has continuously pushed higher and we are now in the seasonally bullish period for stocks. I will maintain my 100% allocation to SPY in November. The trend remains up and I intend to follow the trend.
Chart 3 - Monthly IWM with 6/10 Moving Averages
Chart 3 shows that IWM gained 4.25% in October. It again tested the red ten month moving average and it bounced off of the EMA which is bullish in my opinion. The chart remains in bullish alignment. IWM remains inside the green box in the upper right hand corner of the chart which shows that IWM has been range bound since February 2021. We are still waiting to see if this trading range is a sign of distribution which occurs before the index rolls over or if this is just a pause to allow the index to digest its recent gains before the index continues moving higher. We will have to wait and see.
Chart 4 - Monthly IWM:SPY Relative Strength
Chart 4 shows that the IWM:SPY declined in October by closing 2.58% lower. The ratio is in bearish alignment. You can also see that the ratio is making a series of lower highs and lower lows. That is the classic sign of a down trend. I will need the ratio to close above the red ten month moving average before I consider allocating money to IWM over SPY.
Chart 5 - Monthly EFA with 6/10 Moving Averages
EFA closed 3.18% higher in October. Volume was lower for the month. EFA's price did test the red 10 month moving average and bounced off of it. That is a bullish indication in my opinion. EFA remains in bullish alignment. The overall trend for EFA is up.
Chart 6 - Monthly EFA:SPY Relative Strength
The EFA:SPY ratio reached a new low in October. EFA underperformed SPY in October by 3.59% as shown in Chart 6. The ratio remains in bearish alignment. As stated before, I need to see this ratio close above the red 10 month moving average before I allocate money to EFA over SPY.
Chart 7 - Monthly EFA:IWM Relative Strength
Chart 7 shows that EFA underperformed IWM in October by 1.03%. The ratio closed below the blue six month EMA which bearish. The ratio remains in bearish alignment. The potential change in the trend for this ratio that I wrote about last month is still play. The ratio is making a series of higher highs and higher lows while the two moving averages are flattening out. These two events would precede a change in trend. Still I need to see the ratio close above the red 10 month EMA before I would allocate money to EFA over IWM. I will continue to watch this chart to see how events unfold.
Chart 8 - Monthly AGG with 6/10 Moving Averages
AGG lost 0.01% in October. In doing so, AGG failed to close above its red 10 month moving average. AGG has now closed lower for three consecutive months.
Chart 9 - Monthly AGG:SPY Relative Strength
The AGG:SPY ratio in Chart 9 reached a new low as bonds underperformed stocks by 6.56%. The ratio remains in bearish alignment. There is no reason for investors to favor bonds over stocks at this time.
Earlier in the article I mentioned that stocks are now in their seasonally favorable period of the year. Chart 10 below shows the returns of the S&P 500 index for each month over the last 20 years.
Chart 10 - S&P 500 Monthly Returns
The numbers on top of each bar indicate the percentage of time that month had a positive return. The numbers at the bottom of each bar indicate the percentage return on average for that month over the last 20 years. For example, November as a month was positive 79% of the time over the last 19 years. November averaged a 1.9% return for the last 19 years. You can see that November is the second best performing month over the past 20 years. It is second only to April. The bulk of the market's returns come in the October to May time period.
In summary, all of the equity ETFs I follow for my retirement account increased in October. I still contend that SPY remains the best place to put my money. SPY remains in bullish alignment. Over the last several months it has performed better than the other ETFs mentioned in this article. We are now entering the best season of the year to make money. I will maintain my 100% allocation to SPY due to its dominant performance compared to AGG, EFA, and IWM. The SPY trend is still bullish, so I will continue to follow the trend.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SPY either through stock ownership, options, or other derivatives. 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.
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