In this month’s article I will outline why I will maintain my 100% allocation to the SPDR S&P 500 ETF (SPY) in January. First let me review my pension plan performance in December. The market, as measured by the S&P 500 index, increased 4.36%. As for my pension plan assets, I slightly outperformed the index by gaining 4.63% in December. My investment objective of preserving my capital was met as I did not lose 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 December 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 28.70% for the last 12 months and simply investing in SPY would have returned 28.76% for the last 12 months. Therefore, I have underperformed SPY for the last 12 months by 0.06%.
Table 1 – Investment Returns for December
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 closed the year with a 4.63% gain in December. SPY closed at new highs and did so on higher volume. 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 January. 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 2.27% in December. IWM remains inside this multi-month trading range outlined in green. The chart remains in bullish alignment. Two other items stand out as bullish on this chart. First is the high volume on a month where price rose over 2%. Second in the bullish doji candlestick. This is a candle where price opened and closed at the high end of the candlestick range. It indicates that sellers could not keep the price down on IWM for the month. In other words, IWM exhibited bullish price action.
Chart 4 – Monthly IWM:SPY Relative Strength
Chart 4 shows that the IWM:SPY ratio declined 2.25% in December. 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 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 gained 4.39% in December. EFA is in bullish alignment. EFA remains inside the narrow range outlined by the green box. The overall trend for EFA is still up. Higher volume for the month is a bullish sign. Perhaps EFA can break out above the green box in early 2022.
Chart 6 – Monthly EFA:SPY Relative Strength
The EFA:SPY ratio reached a new low in December. EFA underperformed SPY in December by modest 0.22% 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 December by 2.07%. The ratio is in bearish alignment yet some aspects of the ratio are improving. 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. The ratio did manage to close above the red 10 month moving average which is what I have said needs to be done prior to me allocating 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 declined 0.36% in December. It continues to trade in a very narrow range. The range has been between $116 on the high side and $112 on the low side. AGG has been in and out of bullish alignment over the last year due to price staying in this narrow range. This indecisiveness has produced numerous whipsaws in 2021.
Chart 9 – Monthly AGG:SPY Relative Strength
The AGG:SPY ratio in Chart 9 declined 4.76% as AGG largely underperformed SPY. The ratio remains in bearish alignment as it reached a new low. 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 increased in December. 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.