My Current View Of The S&P 500 Index: August 2022 Edition (Technical Analysis)

Jul. 31, 2022 10:38 AM ETSPDR S&P 500 Trust ETF (SPY)AGG, EFA, IWM27 Comments
Walter Zelezniak Jr profile picture
Walter Zelezniak Jr
2.96K Followers

Summary

  • The S&P 500 index rebounded in July.
  • SPY remains in bearish alignment.
  • There are no changes in my investment allocation.

Bull and Bear Symbol with Stock Market Concept.

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In this month's article I outline why I will maintain my allocation to the SPDR S&P 500 ETF (NYSEARCA:SPY) in August to 40% with the other 60% of my assets to cash. First let me review my pension plan performance in July. The market, as measured by the S&P 500 index, had an excellent return of 9.11%. As for my pension plan assets, I underperformed the index as my investment allocation returned 3.83%. My investment objective of preserving my capital was met as I did make money. I did not meet my second investment objective which is beating the S&P 500 index. These results are the exact opposite of last month. Table 1 below shows my returns and allocations for the month of July 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 a negative 5.19% for the last 12 months and simply investing in SPY would have returned a negative 4.69% for the last 12 months. Therefore, I have underperformed SPY for the last 12 months by 0.50%.

Table 1 - Investment Returns for July

My pension plan investment returns for July 2022

Author

Table 2 - Investment Returns Last 12 Months

My pension plan investment returns in last 12 months

Author

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

Monthly SP 500 Index with 6/10 Moving Averages

www.stockcharts.com

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 like 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

Monthly SPY with 6/10 Moving Averages

www.stockcharts.com

Chart 2 shows that SPY gained 9.21% in July. A very nice return. SPY remains in bearish alignment. The return for July was accomplished on low volume. SPY was not able to get above the previous month's high nor was SPY able to close above the blue six month moving average. For August, I am staying with my allocation of 40% to SPY. If SPY can close above the six month moving average in August I will increase my allocation to SPY.

Chart 3 - Monthly IWM with 6/10 Moving Averages

Monthly IWM with 6/10 Moving Averages

www.stockcharts.com

Chart 3 shows that small cap stocks had the best return for July. IWM rose 10.56%. Well done. Despite this impressive performance, IWM remains in bearish alignment. Just like SPY above, the IWM's gain was on lower volume. Also, like SPY, IWM was not able to rise above June's highs. On the bullish front, the green line continues to act as support. The longer IWM remains above the green line, the more valid that level of support becomes. The next bullish development would be IWM closing above the blue six month moving average.

Chart 4 - Monthly IWM:SPY Relative Strength

Monthly IWM:SPY Relative Strength

www.stockcharts.com

Chart 4 shows that the IWM:SPY ratio is remaining at its lows. In July the ratio gained 1.24% as IWM outperformed SPY. That low level seems to be holding which is bullish if you are an IWM investor. Despite that bullish feature, the ratio remains in bearish alignment. Before I consider allocating money to IWM I need to see the ratio get above the red ten month moving average. This could happen soon if markets head higher in August.

Chart 5 - Monthly EFA with 6/10 Moving Averages

Monthly EFA with 6/10 Moving Averages

www.stockcharts.com

Chart 5 shows that EFA gained 5.17% in July. EFA remains in bearish alignment. Like SPY and IWM, July's gains came on lower volume. On the bullish front, EFA tried to reclaim the green line that served as resistance in the previous few years and then became support. That support broke in June. If EFA can stay above the green line that would bolster its chances of moving higher. EFA has some work to do before I would consider allocating money to that ETF. I need to see EFA close above the red ten month moving average.

Chart 6 - Monthly EFA:SPY Relative Strength

Monthly EFA:SPY Relative Strength

www.stockcharts.com

There is nothing new to report for Chart 6. The EFA:SPY ratio showed a decline in July. The ratio is back to its recent lows. I need to see this ratio close above the red ten month moving average before I allocate money to EFA over SPY.

Chart 7 - Monthly EFA:IWM Relative Strength

Monthly EFA:IWM Relative Strength

www.stockcharts.com

Chart 7 shows that EFA underperformed IWM in July by almost 5%. The ratio remains in bullish alignment and is the only bullish alignment you will find in this article. However, that may change next month. The two moving averages are rolling over and the ratio closed below the upward sloping trendline shown in green. Those are two bearish developments. The recent series of higher highs and higher lows may have just broken. I will continue to watch this chart to see how events unfold.

Chart 8 - Monthly AGG with 6/10 Moving Averages

Monthly AGG with 6/10 Moving Averages

www.stockcharts.com

Chart 8 shows that AGG had a nice return of 2.54% in July. AGG remains in bearish alignment and the distance between the two moving averages continues to widen. The good news is that so far, the green line has acted like support. Another bullish sign is that AGG completed a swing low in July. In other words, AGG closed above the highs of the previous month while its low stayed above the low of the previous month. This reversed six months of consecutive lower lows in AGG going back to January.

Chart 9 - Monthly AGG:SPY Relative Strength

Monthly AGG:SPY Relative Strength

www.stockcharts.com

The AGG:SPY ratio in Chart 9 declined 6.11% as AGG underperformed SPY in July. The ratio's close above the red ten month moving average only lasted a month. The ratio is in bearish alignment. If the equity markets continue to rally, most likely this ratio will decline.

In summary, all of the ETFs I covered in this article rallied in July. IWM was a double-digit gainer for the month. While SPY had a nice rally, not much has changed with the chart. SPY remains in bearish alignment. Because of that, I am keeping my allocation of 40% in SPY and 60% in cash. That may be too conservative, and I can live with that. The bottom of the bear market may have been made. I don't know. If SPY closes above its blue six month moving average in August I will increase my allocation to SPY and reduce my allocation to cash. We are now in the unfavorable months for the stock market; June-October. I just try to follow price and the trend. Right now, the trend for equities and bonds remains down. I will monitor the markets for the month of August and then reallocate, if necessary, at the end of the month.

This article was written by

Walter Zelezniak Jr profile picture
2.96K Followers
As an individual investor nearing retirement I am trying to build my financial assets in order to have a fulfilling retirement. I am interested in trading both long and short; or at least using inverse ETFs, to take advantage of market declines. Having long term and short term trading strategies, proper execution of my trading plan, and absolute investing results are my goals. I see my articles as a way to keep me focused on developing winning trades. I also expect to learn much from the feedback that is provided in the comments section.

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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