My Current View Of The S&P 500 Index: March 2022 (NYSEARCA:SPY)
In this month’s article I outline why I will maintain my 100% allocation to the SPDR S&P 500 ETF (NYSEARCA:SPY) in March. First let me review my pension plan performance in February. The market, as measured by the S&P 500 index, lost 3.14%. As for my pension plan assets, I slightly outperformed the index by losing 2.95% in February. 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. It has been a tough two months, no doubt. Table 1 below shows my returns and allocations for the month of February 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 13.71% for the last 12 months and simply investing in SPY would have returned 16.35% for the last 12 months. Therefore, I have underperformed SPY for the last 12 months by 2.64%.
Table 1 – Investment Returns for February
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 2.95% in February. Things could have been much worse. SPY rallied late in the month which is why you can see a long wick or shadow on the monthly candle. SPY managed to close above the 10 month moving average and it closed below the six month moving average. SPY remains in bullish alignment but just barely. I will maintain my 100% allocation to SPY in March. The trend remains up and I intend to follow the trend. It will be interesting to see how things unfold in March.
Chart 3 – Monthly IWM with 6/10 Moving Averages
IWM was the lone winner this month. It managed to rise 1.03% which can be seen on Chart 3. IWM is in an interesting position. It was much lower this month and then staged a rally. Therefore, the candle has a long lower wick or shadow. This month’s candle and last month’s candle offers investors a bullish “tweezers bottom” formation in which the two consecutive lower wicks or candles look like tweezers. This formation often precedes rallies. IWM remains in bearish alignment. However, it wouldn’t surprise me if IWM gains in the month of March. I am interested in seeing how IWM does in March.
Chart 4 – Monthly IWM:SPY Relative Strength
Chart 4 shows that the IWM:SPY ratio gained 4.11% in February. The ratio is still 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. 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 declined 3.43% in February. EFA closed below its 10 month EMA and below the narrow range outlined by the green box. EFA looks to be heading lower. As mentioned last month, if EFA continues to decline the $67.50 area could offer a level of support. You can see how the horizontal green line acted as resistance in the past. Well, it may act as support soon. Investors who are looking for international exposure in their portfolios could consider adding EFA at the support line.
Chart 6 – Monthly EFA:SPY Relative Strength
The EFA:SPY ratio remains in a downtrend. EFA underperformed SPY in February by 0.49% 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 February by 4.42%. The ratio remains in bullish alignment. 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
AGG lost 1.15% in February. AGG is in bearish alignment and the distance between the two moving averages is widening. AGG also closed outside of the green box which contained its recent trading range. All of that is bearish. On the optimistic side of things, AGG may have found support at the $109 level which is the lower green line which previously acted as resistance. That level may now be support.
Chart 9 – Monthly AGG:SPY Relative Strength
The AGG:SPY ratio in Chart 9 did gain 1.86% as AGG outperformed SPY for the second month in a row. The ratio remains in bearish alignment. There is no reason for investors to favor bonds over stocks currently.
In summary, every ETF that I follow for my retirement account, except IWM, declined in February. Every ETF I follow, except SPY, closed below its 10 month EMA. Being below the 10 month is bearish. SPY remains resilient however. 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 still 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.