In this month’s article I will outline why I will maintain my 100% allocation to the SPDR S&P 500 ETF (SPY) in December. First let me review my pension plan performance in November. The market, as measured by the S&P 500 index, declined 0.83%. As for my pension plan assets, I slightly outperformed the index by only losing 0.80% for the month. My investment objective of preserving my capital was not met as I lost money. 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 November 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 29% for the last 12 months and simply investing in SPY would have returned a little under 28% for the last 12 months. Therefore, I have outperformed SPY for the last 12 months by 1.16%.
Table 1 – Investment Returns for November
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
Chart 2 shows that SPY lost 0.80% in November. This offsets some of the profits that were gained in October. SPY reached new highs in the month but was unable to hold them. This resulted in a bearish looking candle. On the positive side, new highs are always bullish and the volume for the month was lower. 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 December. 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 declined 4.33% in November thereby giving up all of its gains from October. IWM is back to testing the red 10-month moving average which is acting as support at the moment. IWM remains inside this multi-month trading range outlined in green. The chart remains in bullish alignment. On a bearish note, volume for the month was noticeably higher. 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
There are no surprises in Chart 4. The IWM:SPY ratio declined 3.56% in November. The ratio is 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 down trend. 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
Of the four ETFs I follow for this series of articles, EFA declined the most in November. Chart 5 shows that EFA lost 4.53% thereby surrendering the gains it had in October. EFA is now testing its red 10-month moving average. EFA is also in a multi-month trading range identified by the green box. EFA remains in bullish alignment and its losses were on lower volume which may be considered bullish. The overall trend for EFA is still up.
Chart 6 – Monthly EFA:SPY Relative Strength
The EFA:SPY ratio reached a new low in November. EFA underperformed SPY in November by 3.76% 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 a mere 0.21%. The ratio is in bearish alignment. The potential change in the trend for this ratio that I wrote about last month is still in 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 gained 0.27% in November. It was the only ETF I follow that closed higher for the month. AGG is in bullish alignment. Price is above the blue 6-month moving average which is above the red 10-month moving average. AGG also appears to be in a trading range.
Chart 9 – Monthly AGG:SPY Relative Strength
The AGG:SPY ratio in Chart 9 rebounded slightly as AGG outperformed SPY by 1.08%. The ratio remains in bearish alignment. There is no reason for investors to favor bonds over stocks at this time.
In summary, all of the equity ETFs I follow for my retirement account decreased in November. 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 in 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.