In this month’s article I will outline why I will maintain my 100% allocation to the SPDR S&P 500 ETF (SPY). First let me review my performance in August. The market, as measured by the S&P 500 index, gained 2.90%. As for my pension plan assets, I slightly outperformed the index by gaining 2.98% for the month. So, my investment objective of preserving my capital was met and I met my second investment objective which is beating the S&P 500 index. Table 1 below shows my returns and allocations for the month of August 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 August
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 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 closed at a new monthly high in August by gaining 2.98%. SPY has now closed higher seven months in a row. The two moving averages remain in bullish alignment and the white space between the two moving averages are increasing which is bullish. SPY will continue to receive 100% of my allocation due to its strong performance. SPY remains bullish and new highs are always good. 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 bounced back this month gaining 2.20%. It tested the red ten month moving average and bounced off of the EMA. 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
The IWM:SPY ratio declined again in August as the ratio trades below the two moving averages. The ratio is no longer in bullish alignment which is to be expected after several months of lower prices. It will be interesting to see if the ratio re-tests the 2020 lows or if it can stay above that level and form a higher low. That is to be determined at this time. I will need the ratio to close above the red ten month moving average before I consider allocating money to IWM.
Chart 5 – Monthly EFA with 6/10 Moving Averages
EFA posted a nice gain of 1.45% albeit on lower volume. It closed at a new high. EFA remains in bullish alignment and the white space between the two moving averages continues to grow which is also bullish.
Chart 6 – Monthly EFA:SPY Relative Strength
EFA underperformed SPY in July by 1.49% and registered another new low in the ratio. 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 August by 0.74%. The ratio was rejected at the 10 month EMA and it did manage to close above the blue six month EMA which is positive if you are a bull. The ratio remains in bearish alignment. You can see some evidence of a potential change in the trend however. The blue six month moving average is starting to trend higher. I have been writing that there is no reason to invest in EFA over IWM until this ratio at least closes above the red 10 month moving average. It’s possible that scenario can happen in September. We will have to wait and see. I will continue to watch this chart to see how events unfold.
Chart 8 – Monthly AGG with 6/10 Moving Averages
AGG lost 0.20% in August making it the only ETF I follow that declined in August. AGG remains in bullish alignment and is within striking distance of new highs.
Chart 9 – Monthly AGG:SPY Relative Strength
There were no significant changes to Chart 9. Investors still prefer equities to bonds. The AGG:SPY ratio declined 3.08% in August. As I mentioned numerous times, I am still waiting for the ratio to close above the red ten month moving average line before I consider allocating money to AGG.
In summary, all of the ETFs I follow for my retirement account closed higher in August except AGG which was down slightly. SPY closed at new highs and continues to be the best performing ETF I follow. My decision last month to allocate 100% of my retirement assets to SPY proved fruitful. I will maintain my 100% allocation to SPY due to its dominant performance. The trend is still bullish, so I will continue to follow the trend.