Daily Stock Market Reports

My Current View Of The S&P 500 Index: February 2022 Edition (SPY)


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In this month’s article I outline why I will maintain my 100% allocation to the SPDR S&P 500 ETF (SPY) in February. First let me review my pension plan performance in January. The market, as measured by the S&P 500 index, lost 5.26%. As for my pension plan assets, I slightly underperformed the index by losing 5.27% in January. My investment objective of preserving my capital was not met as I lost money and I did not meet my second investment objective which is beating the S&P 500 index. Not the best way to start off the new-year. Table 1 below shows my returns and allocations for the month of January 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 21.36% for the last 12 months and simply investing in SPY would have returned 23.22% for the last 12 months. Therefore, I have underperformed SPY for the last 12 months by 1.86%.

Table 1 – Investment Returns for January

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Table 2 – Investment Returns Last 12 Months

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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

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www.stockcharts.com

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

www.stockcharts.com

Chart 2 shows that SPY started the year with a 5.27% loss. SPY managed to close above both moving averages which didn’t seem possible early last week. 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 February. The trend remains up and I intend to follow the trend. During the month, when prices were lower than where they closed the month, several readers posted comments asking what my system says to do now. My system relies on a monthly closing price and I only adjust my positions, if at all, at the end of the month. I choose this time frame because it reduces the amount of time I have to spend monitoring prices for my retirement assets. Of course, I give up some amount of responsiveness by waiting for monthly closing prices and that is okay with me.

Chart 3 – Monthly IWM with 6/10 Moving Averages

chart

www.stockcharts.com

Chart 3 shows that IWM took it on the chin in January by losing 9.53%. IWM has closed outside of its multi-month trading range outlined in green. It also closed below its 10 month moving average which would be concerning if I had money allocated to IWM. IWM was lower during the month but managed to rally at the end of the month which is why there is a tail or a shadow at the bottom of the candle. Perhaps that is a bullish sign. At the moment caution is warranted for IWM investors.

Chart 4 – Monthly IWM:SPY Relative Strength

chart

www.stockcharts.com

Chart 4 shows that the IWM:SPY ratio declined 4.50% in January. 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. It is now again at all-time lows. 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

www.stockcharts.com

Chart 5 shows that EFA declined 3.63% in January. EFA closed below its 10 month EMA and remains inside the narrow range outlined by the green box. The overall trend for EFA is sideways which makes it very difficult to trade. It’s up one month and then down the next month. Sometime in 2022 EFA will break out of its green box. The question is which way will it break, higher or lower? If EFA breaks lower, the $67.50 area could offer a level of support.

Chart 6 – Monthly EFA:SPY Relative Strength

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www.stockcharts.com

The EFA:SPY ratio rebounded in January. EFA outperformed SPY in January by 1.73% 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

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www.stockcharts.com

Chart 7 shows that EFA outperformed IWM in January by 6.52%. The ratio is now in bullish alignment for the first time in well over a year. The ratio is making a series of higher highs and higher lows while the two moving averages are now trending higher. I will continue to watch this chart to see how events unfold.

Chart 8 – Monthly AGG with 6/10 Moving Averages

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www.stockcharts.com

AGG declined 2.00% in January showing that even bonds were not a safe haven in a tough market environment. AGG is now is bearish alignment with a very ugly looking candle. It is now at the bottom of a trading range that goes back to the beginning of 2020. 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

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www.stockcharts.com

The AGG:SPY ratio in Chart 9 did gain 3.46% as AGG outperformed SPY. 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 ETFs I follow for my retirement account declined in January. Every ETF I follow, except SPY, closed below its 10 month EMA. Being below the 10 month is bearish. SPY remains resilient however. It closed the month in bullish alignment with price being above its 6 month EMA which was above the 10 month EMA. I still contend that SPY remains the best place to put my money. 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.



Read More: My Current View Of The S&P 500 Index: February 2022 Edition (SPY)

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