In this month’s article, I outline why I will change my allocation to the SPDR S&P 500 ETF (SPY) in May to 50% with the other 50% of my assets to cash. First let me review my pension plan performance in April. The market, as measured by the S&P 500 index, lost 8.80%. As for my pension plan assets, I slightly outperformed the index by only losing 8.78% in April. My investment objective of preserving my capital was not met, as I lost money, but 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 April, 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 0.63% for the last 12 months and simply investing in SPY would have returned 0.05% for the last 12 months. Therefore, I have underperformed SPY for the last 12 months by -0.67%.
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: 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
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
Chart 2 shows that SPY closed the month of April being down 8.78%. That’s the biggest percentage loss for SPY since March 2020. SPY closed below both moving averages and both moving averages are now turning lower. Due to SPY closing below the red 10-month moving average, I am reducing my exposure to SPY by 50%. For May I will have 50% of my assets in SPY and the other 50% of my assets in cash ready to be deployed when market conditions change for the better.
April’s SPY candle was quite bearish. It is interesting to note that volume was lower for the month. The market also held around lows of the two preceding candle wicks which made the tweezer bottom discussed last month. Right now, the trend seems to be heading lower so I will park some assets in cash and see how the month unfolds.
Chart 3 – Monthly IWM with 6/10 Moving Averages
IWM had a rough month. Small cap stocks lost 9.90% in April. This represented the worst performance of the ETFs I follow for my pension plan. IWM remains in bearish alignment which is bad. Like SPY above, the volume of IWM was lower last month, which maybe is a positive development. The “tweezers bottom” which I wrote about last month has been exceeded to downside which is a bearish development. Last month I wrote that I am interested to see which has more predictive power, “the pattern formation of the tweezers bottom or the trend formation of the bearish alignment.” So far, it appears the trend formation has more predictive power.
Chart 4 – Monthly IWM:SPY Relative Strength
Chart 4 shows that the IWM:SPY ratio is again testing its lows. It will be interesting to see if these lows hold or if the ratio makes new lows. The ratio remains in bearish alignment. You can also see that the ratio has been making a series of lower highs and lower lows since the beginning of 2021. That is the classic sign of a downtrend. Investors still prefer large cap U.S. equities over small cap U.S. equities. I will need the ratio to close above the red 10 month moving average before I consider allocating money to IWM over SPY.
Chart 5 – Monthly EFA with 6/10 Moving Averages
Chart 5 shows that EFA lost 6.74% in April. This was the best performing equity ETF I follow for my pension plan account. EFA is in bearish alignment. EFA volume was lower for the month. So far, the $67.50 area is acting as support. We will see if that level holds this month or if EFA breaks below that level.
Chart 6 – Monthly EFA:SPY Relative Strength
The EFA:SPY ratio remains in a downtrend. EFA did outperform SPY in April by 2.23% 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 outperformed IWM in April by 3.51%. The ratio remains in bullish alignment. This is the only bullish alignment you will find in this article. The ratio is making a series of higher highs and higher lows while the two moving averages are now trending higher. I will continue to watch this chart to see how events unfold.
Chart 8 – Monthly AGG with 6/10 Moving Averages
AGG lost 3.81% in April. AGG is in bearish alignment and the distance between the two moving averages continues to widen. The next level of support may be the level around $100 which is identified by a horizontal green line. Perhaps AGG can put in a stand at that level. Like all of ETFs discussed so far, AGG also traded on lower volume in April.
Chart 9 – Monthly AGG:SPY Relative Strength
The AGG:SPY ratio in Chart 9 lost 6.33% as AGG underperformed SPY in March. The ratio remains in bearish alignment. There is no reason for investors to favor bonds over stocks currently.
In summary, every equity ETF that I follow for my retirement account, lost money in April. AGG was the best performer, as bonds only lost 3.81% in April. Due to SPY closing below its red 10-month moving average, I am reducing my exposure to that position by half. I will have 50% of my assets in SPY and the other 50% of my assets will be in a cash position.
May marks the end of the traditionally bullish period for stocks. Perhaps stocks put in a stand and rally some in May. Or perhaps equities continue to fall. I will continue to monitor the markets and adjust as necessary.