My Current View Of The S&P 500 Index: April 2020 Edition

Sheer with friend
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S&P 500 Index, This month’s article will outline why I will changed my

allocation to 25% to the SPDR S&P 500 Trust ETF (SPY) and 75% to the

iShares Core U.S. Aggregate Bond ETF (AGG) with my retirement assets in

April. First, let me review my performance in March. It was another down

month. The market, as measured by the S&P 500 index, lost 12.51%. As for my pension plan assets, I had a loss of 6.51% in March which outperformed

the SPY ETF. My investment objective of preserving my capital was not met

as I had a loss for the month. I did, however, beat the overall market as

measured by the S&P 500 index. Table 1 below shows my returns and

allocations for the month of March and Table 2 below shows my returns for

the past 12 months.

Table 1 – Investment Returns for March

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, 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.

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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 S&P 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 preservation. S&P 500 Index

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. S&P 500 Index

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 has three consecutive monthly losses for the first

time since early 2016. SPY lost 12.49% in March. Volume for the month was

the highest in the past five years. You will see that heavy volume is a theme

in all of the ETFs in March. SPY lost its bullish alignment and is now in a

bearish alignment. It appears that a bear market is upon us. Last month I

stated that I would reduce my exposure to SPY because last month SPY

closed below its 10-month EMA. I am glad I made that decision. This month,

due to the moving average crossover resulting in a bearish alignment, I will

further reduce my exposure to SPY by 50%. S&P 500 Index

Chart 3 – Monthly IWM with 6/10 Moving Averages

Yikes! Chart 3 shows that IWM lost 21.48% in March. Volume for the month

was the highest it’s been in five years. IWM had a bearish crossover and is

now in bearish alignment. I will not allocate any money to IWM due to

being in bearish alignment. S&P 500 Index

Chart 4 – Monthly IWM:SPY Relative Strength

Chart 4 shows the relative strength of IWM compared to SPY. IWM

underperformed SPY by 10.27% in March. The ratio remains in bearish

alignment. The reason I avoided having money in IWM and suffering a loss

of over 20% in March is due to looking at the trend shown in Chart 4 above.

IWM has been a consistent underperformer compared to SPY, and until that

changes, I will avoid having money allocated to IWM. As stated in previous

articles, signs of potential change in the performance of this ratio would be

for the ratio to close above the dashed green trendline or for the ratio to

close above the 10-month moving average.

Chart 5 – Monthly EFA with 6/10 Moving Averages

Chart 5 shows that EFA lost 14.11% in March. EFA had a bearish crossover

and EFA is now in bearish alignment. Volume was the highest in the last

five years. I said last month that EFA appeared to be under pressure and it

proved to be true. At this time, I will not allocate any money to EFA.

Chart 6 – Monthly EFA:SPY Relative Strength

In March, EFA slightly underperformed SPY by 1.85% as shown on Chart 6.

The long downward trend of underperformance continues. Since mid-2017,

EFA has not been the place to invest money compared to SPY. I will continue

to review this ratio looking for the ratio to close above its 10-month moving

average. Until that happens, I will avoid allocating money to EFA.

Chart 7 – Monthly EFA:IWM Relative Strength

EFA continues to outperform IWM, this time by 9.39%. For the fourth month

in a row EFA outperformed IWM. The EFA:IWM ratio closed just outside the

green box and is in bullish alignment. I will continue to monitor this ratio.

Chart 8 – Monthly AGG with 6/10 Moving Averages

Chart 8 shows that AGG had a wide range during March. AGG ranged over

12 points in the month which you can see is unprecedented over the last

five years. All in all, AGG lost 0.53% for the month. It remains in bullish

alignment again meaning that higher prices are probable. Volume for the

month more than doubled February’s volume and it was the highest in the

last five years.

Chart 9 – Monthly AGG:SPY Relative Strength

Chart 9 shows that AGG outperformed SPY in March by 13.67%. This is

unusual in that most of the time if you heard one asset outperform the

other by 13% you would assume you made money with the stronger asset.

However, as Chart 8 shows, AGG lost money in the month of March. The good news is that AGG lost the least when compared to the other ETFs

available in my retirement fund. AGG has remained above the 6- and 10-

month moving averages which is bullish. AGG has risen above the

December 2018 high. In previous articles, I stated that in order for AGG to

reverse its long-term underperformance to SPY, the AGG:SPY ratio would

have to close above the December 2018 level. Since that has happened and

SPY is in a bearish alignment, I will increase my allocation to AGG to 75% as

it appears to be the strongest ETF available in my retirement fund.

In summary, equity markets continued to sell off in March. Every ETF that I

follow for my retirement assets declined in March. SPY, EFA, and IWM are

all in bearish alignment. Only AGG is in bullish alignment. Due to SPY now

being in bearish alignment, I am going to reduce my exposure to SPY by half. In April, I will allocate 25% of my assets to SPY and 75% to AGG. The

reason I am maintaining some exposure to SPY is because SPY has already

declined considerably. SPY has declined about 24% from its high to its close

in March. SPY has declined about 35% to its lowest price in March. I don’t

know when the next bull market will begin, but when it does, SPY will most likely rise swiftly before it crosses above its 6- or 10-month EMA. By

maintaining some exposure to SPY, I will at least get some of that gain back

in my portfolio. AGG will also rise when the new bull market begins and most likely AGG will have a gain that is larger than the cash position pays. That is why I am not allocating any money to cash. As of now, we are in the midst of a new bear market. I don’t know how long it will last or what the severity of it will be. I will be looking for SPY to close above the 6-month moving average as a first sign of a potential new bull market. Until that time, I will continue to monitor the markets.

Disclosure: I am/we are long SPY, AGG. 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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