To The Moon

Summary

• I am changing my pension plan asset allocation to 100% SPDR S&P 500 ETF due to its bullish alignment and positive performance in May.

• The EFA:SPY ratio is no longer in bullish alignment, leading me to move away from EFA and focus solely on SPY.

• Despite entering a seasonally less bullish period for stocks, I will continue to follow the upward trend of SPY and adjust their strategy if necessary next month.

silhouette form of bull on technical financial graph

$E-mini S&P 500 - main 2306(ESmain)$ In this month’s article I outline why I will change the allocation of my pension plan assets to 100% to the SPDR S&P 500 ETF (NYSEARCA:SPY). I will have no cash position. First, let me review my pension plan performance in May. The market, as measured by the S&P 500 index, gained 0.25% for the month as can be seen in Chart 1 below. As for my pension plan assets, I underperformed the index as my investment allocation lost 1.79% compared to a gain from the S&P 500. My investment objective of preserving my capital was not met as I did not make money. I did not 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 May 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 -0.23% for the last 12 months and simply investing in SPY would have returned 2.92% for the last 12 months. Therefore, I have underperformed SPY for the last 12 months by 3.16%.

Table 1 – Investment Returns for May

Performance Table

Table 2 – Investment Returns Last 12 Months

Performance Table

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) , Vanguard Extended Market Index Fund (VXF), 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 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

Price Chart

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 like 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.

The following charts show the status of the ETFs that I am allowed to buy in my retirement account.

Chart 2 – Monthly SPY with 6/10 Moving Averages

Price chart

Chart 2 shows that SPY gained 0.46% in May. That gain was not robust, but it was positive. SPY has been up for three consecutive months. SPY remains in bullish alignment and volume was higher than the previous month. SPY still looks good to me. It will be interesting to see how it moves from here. The market does well historically from November to May. We’ll see if the market maxim “sell in May and go away” holds for the next several months. Perhaps the market stays strong and rallies throughout the summer months. Only time will tell. For reasons that I will outline later in the article, I am allocating 100% of my funds to SPY in June.

Chart 3 – Monthly VXF with 6/10 Moving Averages

Price Chart

Chart 3 shows that VXF gained 0.46% in May, just like SPY did. VXF, however, is in a bearish alignment and remains inside an area of consolidation outlined by the green box. This area can lead to many whipsaws as prices move above and below the 10-month moving average while not moving above or below the area of consolidation. Over the past year, the $120 - $130 price level has been tested several times as has the $150 price level. I’m interested to see how long prices remain inside the area of consolidation. A maxim of technical analysis is that the longer the base the bigger the expected move once price breaks out of the base. Keep in mind that the breakout of the base or the area of consolidation could be lower. I will not have any allocation to VXF in June.

Chart 4 – Monthly VXF:SPY Relative Strength

Price Chart

The VXF:SPY ratio traded even in May as both funds returned the same 0.46%. The VXF:SPY ratio remains in bearish alignment and remains at multi-year lows. I see no need to be in VXF in June.

Chart 5 – Monthly EFA with 6/10 Moving Averages

Price Chart

Chart 5 shows that EFA was the worst performing ETF that I follow. In May, EFA lost over 4% which contributed to me losing money in May. It’s interesting that EFA tested the supply or distribution zone outlined by the green box and price was rejected in that zone. EFA candle looks like a bearish engulfing candle meaning that the top and the bottom of the price action this month was higher than and lower than the price action of the previous month or candle. That’s not the type of price action bulls want to see coming out of that supply zone. Especially on higher volume. EFA bulls can be happy that EFA remains in bullish alignment. At this moment, the trend is still higher.

Chart 6 - Monthly EFA:SPY Relative Strength

Price Chart

Chart 6 shows that the EFA:SPY ratio lost 4.45% in May. The ratio is no longer in bullish alignment. This is the reason that I am no longer allocating money to EFA. While EFA is in bullish alignment as shown in Chart 5, the EFA:SPY ratio no longer favors EFA over SPY. It is time for me to move on from EFA.

Chart 7 – Monthly EFA:VXF Relative Strength

Price Chart

Chart 7 shows that EFA underperformed VXF in May by 4.45%. The ratio remains in bullish alignment. This chart still looks bullish to me.

Chart 8 – Monthly AGG with 6/10 Moving Averages

Price Chart

Chart 8 shows that AGG lost 1.14% in May. AGG suffered a setback as it is no longer above its 10-month moving average. AGG is stuck in a consolidation zone between $96 and $101. If you are bullish on AGG, the next thing you want to see is AGG go into bullish alignment where price is above both moving averages and the blue 6-month moving average is above the red 10-month moving average. That could happen in June if AGG has a strong month. Regardless, I still prefer equities and will have no exposure to AGG in June.

Chart 9 – Monthly AGG:SPY Relative Strength

Price Chart

The AGG:SPY ratio in Chart 9 lost 1.60% as AGG underperformed SPY in May. The ratio is trading in a consolidation pattern, moving sideways since mid-2021. The next step is for the ratio to put in a series of higher highs and higher lows. Then the ratio can get to bullish alignment.

In summary, May was bullish for half of the ETFs I track for my pension fund. SPY and VXF were both up slightly in May. EFA and AGG both lost money in May. The EFA:SPY ratio rolled over and is no longer in bullish alignment. That is the reason I am allocating 100% of my pension fund assets to SPY in June. With the onset of June, we are no longer in the seasonally bullish period for stocks. Or so people believe. SPY is still trending higher, and I will continue to follow that trend. I’ll see how things progress and I’ll be prepared to change course next month if necessary.

Source: seeking alpha