Daily Stock Market Reports

My Current View Of The S&P 500 Index: August 2021 Edition (NYSEARCA:SPY)


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In this month’s article, I will outline why I will be 100% allocated to the SPDR S&P 500 ETF (NYSEARCA:SPY) for my retirement assets in August. First let me review my performance in July. The market, as measured by the S&P 500 index, gained 2.27%. As for my pension plan assets, I slightly underperformed the index by gaining 1.83% for the month. So, my investment objective of preserving my capital was met and I didn’t 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 July 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 37% for the last 12 months and simply investing in SPY would have returned just over 33% for the last 12 months. Therefore, I have outperformed SPY for the year by about 4.00%.

Table 1 – Investment Returns for July

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 high in July by gaining 2.44%. SPY has now closed higher six 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. In August, SPY will receive 100% of my allocation due to changes discussed in the charts below. 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 suffered its first loss in 10 months as it declined 3.63%. IWM had that loss on higher volume which would be considered bearish. The chart remains in bullish alignment. Another positive is that price was rejected at the 10-month moving average. The green box in the upper right hand corner of the chart shows that IWM has been range bound since February 2021. Is this a sign of distribution which occurs before the index rolls over or is this just a pause to allow the index to digest its recent gains? We will have to wait and see.

Chart 4 – Monthly IWM:SPY Relative Strength

The IWM:SPY ratio declined again in July as the ratio sliced right through the two moving averages. The decline in the ratio of 5.92% was steep. The ratio does remain in bullish alignment. That being said I am going to reduce my allocation to IWM in August to zero. I have to respect the close below the red 10-month moving average.

Chart 5 – Monthly EFA with 6/10 Moving Averages

EFA bounced back this month and gained 0.77% on higher volume which is considered bullish. EFA is 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 1.63% and registered a new low in the ratio. The ratio remains in bearish alignment. What’s worse is that the two moving averages are now starting to decline again. Previously I wrote that the two moving averages were flattening out which would perhaps soon lead to a bullish alignment scenario. 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 considerably outperformed IWM in July as the ratio gained 4.57%. 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. The ratio closed above the blue six-month moving average. 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 August. I will continue to watch this chart to see how events unfold.

Chart 8 – Monthly AGG with 6/10 Moving Averages

AGG gained 1.12% in July. It has risen four months in a row. AGG is in bullish alignment and is within striking distance of new highs.

Chart 9 – Monthly AGG:SPY Relative Strength

Chart 9 shows that investors still prefer equities to bonds. The AGG:SPY ratio declined 1.29% in July. As I mentioned last month, I am still waiting for the ratio to close above the red 10-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 July except IWM. SPY closed at new highs. The other three ETFS are all within striking distance of new highs and all of the ETFs are in bullish alignment. An allocation change is necessary because the IWM:SPY ratio closed below its ten-month moving average. That close has to be respected. SPY is the best-performing ETF and it will receive 100% of my retirement funds in August. The trend is still bullish, so I will continue to follow the trend.



Read More: My Current View Of The S&P 500 Index: August 2021 Edition (NYSEARCA:SPY)

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