AGG - My Current View Of The S&P 500 Index: March 2023 Edition (Technical Analysis)

Summary

• SPY lost its red 10-month moving average.
• Increasing my exposure to EFA to 50%.
• Increasing my exposure to IWM to 30%.

In this month’s article I outline why I am maintaining my 20% allocation to the SPDR S&P 500 Trust ETF ( SPY ), increasing my exposure to a 30% position in the iShares Russell 2000 ETF ( IWM ), and increasing my exposure to 50% in the iShares MSCI EAFE ETF ( EFA ). I will have no cash position. First, let me review my pension plan performance in February. The market, as measured by the S&P 500 index, lost 2.61% for the month as can be seen in Chart 1 below. As for my pension plan assets, I outperformed the index as my investment allocation lost 1.67% compared to a larger loss from the S&P 500. My investment objective of preserving my capital was not met as I did not make money. I did 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 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 a negative 4.98% for the last 12 months and simply investing in SPY would have returned a negative 5.38% for the last 12 months. Therefore, I have outperformed SPY for the last 12 months by 0.40%.

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, iShares Russell 2000 ETF, and iShares MSCI EAFE ETF. 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

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.

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 period.

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

Chart 2 shows that SPY lost 2.51% in February. Volume for the month was a bit higher than the volume in January. It’s also noteworthy that SPY closed below its red 10 month moving average. Looking at the candle for the month that high upper wick of the candle shows that bulls were strong earlier in the month and then the market turned around and ended with a loss. Not a bullish development for sure. That high upper wick tells me that the market could trade lower this month. It doesn’t have to, though. Back in January 2021 the monthly candle was like last month’s candle. It is circled in green on Chart 2. Both candles were red and both candles had a high upper wick. However, the market rallied in February 2021. Maybe next month the market will rally. What might be bullish is that while SPY declined it didn’t give up more than half of last month’s gains and closed at the downward sloping trendline drawn in green. I take that as being bullish. The market is still trading sideways as I mentioned in last month’s article. SPY needs to recapture its red 10-month moving average and then work its way higher. I will maintain my position in SPY. As I have said in previous articles, I do like to have some exposure to SPY for when the bear market ends, and the next rally starts. I still think that the next rally may have already started back in October.

Chart 3 – Monthly IWM with 6/10 Moving Averages

Chart 3 shows that small cap stocks gave back some of January’s gains. In February, IWM lost 1.72%. This was the best performing ETF that I follow. Volume was less than the previous month. IWM and SPY traded the same for the month. They both have red bearish candles with high wicks. Both of them didn’t give up more than half of last month’s gains which I think is bullish. Unlike SPY, IWM is still above its red 10-month moving average and is almost in bullish alignment. The low for IWM was made in June 2022 and I think IWM looks bullish.

Chart 4 – Monthly IWM:SPY Relative Strength

The IWM:SPY ratio gained 3.32% in February as IWM outperformed SPY and all the other ETFs in this article. The ratio is back above both moving averages which is bullish. If the ratio can close above the high of October, then I can say that the trend has reversed as the ratio would have put in a higher low and a higher high. Next, I need to see a moving average crossover that would put the ratio in bullish alignment. Because of the strong performance in this ratio, I will increase my IWM allocation to 30% of my retirement assets.

Chart 5 – Monthly EFA with 6/10 Moving Averages

Chart 5 shows that EFA lost 3.07% in February. It too didn’t give back more than half of last month’s gain which I consider to be a bullish development. It closed well above both moving averages which are now in bullish alignment. EFA has the strongest looking chart. Foreign stocks are leading the new bull market.

Chart 6 – Monthly EFA:SPY Relative Strength

Chart 6 shows that the EFA:SPY ratio lost 0.57% in February. The ratio remains in bullish alignment. Because of this strong performance I will increase my exposure to EFA to 50% of my retirement assets.

Chart 7 – Monthly EFA:IWM Relative Strength

Chart 7 shows that EFA underperformed IWM in January by 1.38%. The ratio closed below the dashed green line and the ratio remains above the highs made earlier this year. This chart still looks bullish to me.

Chart 8 – Monthly AGG with 6/10 Moving Averages

Chart 8 shows that AGG lost 2.67% in February. AGG’s candle for February was very bearish and AGG lost its red 10-month moving average after closing above it for the first time in over a year last month. Now both moving averages are trending lower. Oh well. For now, the green line representing a level of support has held. We will see how things move forward. I still have no position in AGG.

Chart 9 – Monthly AGG:SPY Relative Strength

The AGG:SPY ratio in Chart 9 lost 0.16% as AGG underperformed SPY in February. 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, February was bearish for all of the ETFs. There are some scary looking bearish candles on the SPY, IWM and AGG charts. SPY and AGG closed below their red 10-month moving averages. On the other hand EFA and IWM are both above their red 10-month moving averages which is bullish. Also in the bullish camp, SPY, IWM, and EFA while down for the month, didn’t give up more than half of the gains from January. Because of the bullish action of EFA and IWM, I am increasing my exposure to those two positions. In March I will have 20% in SPY, 30% in IWM, and 50% in EFA as EFA is in bullish alignment. If this allocation turns out to be a mistake, the charts will let me know and then I will adjust next month.

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