SPY - My Current View Of The S&P 500 Index: September 2022 Edition (Technical Analysis)

Summary

• My allocation remains the same.
• All ETFs are in bearish alignment.
• All ETFs have held above their June lows.

In this month's article, I outline why I will maintain my allocation to the SPDR S&P 500 ETF ( SPY ) in September to 40% with the other 60% of my assets to cash. First let me review my pension plan performance in August. The market, as measured by the S&P 500 index, lost 4.24% for the month. As for my pension plan assets, I outperformed the index as my investment allocation only lost 1.49%. 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. These results are the exact opposite of last month. Table 1 below shows my returns and allocations for the month of August 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 9.30% for the last 12 months and simply investing in SPY would have returned a negative 11.23% for the last 12 months. Therefore, I have outperformed SPY for the last 12 months by 1.92%.

Table 1 - Investment Returns for August

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 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 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 declined 4.08% in August. SPY remains in bearish alignment. Volume for the month was again low. SPY was above the two moving averages earlier in the month and was not able to hold above them. That is considered bearish in my opinion. On the bullish side of the equation, SPY has held above the June lows. We will see where we go from here. For September, I am staying with my allocation of 40% to SPY. If SPY can close above the six-month moving average in September, I will increase my allocation to SPY.

Chart 3 - Monthly IWM with 6/10 Moving Averages

Chart 3 shows that small cap stocks had, of all the ETFs I write about in this article, the best return for August. They had the best return for July as well. (Perhaps that indicates that the recession is over or is very shallow). IWM only declined 2.00%. IWM remains in bearish alignment. Just like SPY above, the IWM traded on lower volume. Also, like SPY, IWM was above the two moving averages earlier in the month and was unable to hold those levels. Again, I think that is a bearish development. On the bullish front, the green line continues to act as support and IWM is still above the June lows. The longer IWM remains above the green line, the more valid that level of support becomes. The next bullish development would be IWM closing above the blue six-month moving average.

Chart 4 - Monthly IWM:SPY Relative Strength

Chart 4 shows that the IWM:SPY ratio is perhaps bottoming. In August the ratio gained 2.17% as IWM outperformed SPY. The low level seems to be holding which is bullish if you are an IWM investor. Despite that bullish feature, the ratio remains in bearish alignment. Before I consider allocating money to IWM I need to see the ratio get above the red ten-month moving average. This could happen in September.

Chart 5 - Monthly EFA with 6/10 Moving Averages

Chart 5 shows that EFA lost just over 6% in August. EFA was the biggest loser for the month. Like SPY and IWM, EFA traded on lower volume. EFA remains in bearish alignment. Another bearish development is that EFA is now below the green line which has acted as support and resistance. Bulls would like to see EFA above that green line. Like SPY and IWM, EFA still trades above the June lows which is bullish. As I wrote before, EFA has some work to do before I would consider allocating money to that ETF. I need to see EFA close above the red ten-month moving average.

Chart 6 - Monthly EFA:SPY Relative Strength

There is nothing new to report for Chart 6. The EFA:SPY ratio showed a decline in August. The ratio is at a new low. When looking at a price chart and you see price move from the upper lefthand side to the lower righthand side of the chart, that is the textbook definition of a downtrend. 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 August by 4.20%. The ratio has flipped from being in bullish alignment to now being in bearish alignment. The recent series of higher highs and higher lows has been broken. I will continue to watch this chart to see how events unfold.

Chart 8 - Monthly AGG with 6/10 Moving Averages

Chart 8 shows that AGG lost 3.04% in August. It was a bad month for AGG investors. AGG remains in bearish alignment. AGG also closed below the previous month's low therefore losing the swing low setup I wrote about last month. Like the other ETFs, AGG remains above the June lows and AGG is above the green support and resistance line on the chart.

Chart 9 - Monthly AGG:SPY Relative Strength

The AGG:SPY ratio in Chart 9 gained 1.08% as AGG outperformed SPY in August. The ratio is in bearish alignment. The ratio is trying to make a series of higher highs and higher lows. We will see if it succeeds.

In summary, all the ETFs I covered in this article declined in August. IWM was the month's best performer by only losing 2% for the month. All the price charts are in bearish alignment. I see no reason to change my allocation for September. I am keeping my allocation of 40% in SPY and 60% in cash. That may be too conservative, and I can live with that. The bottom of the bear market may have been made as every ETF remains above the June lows. I don't know. If SPY closes above its blue six-month moving average in September, I will increase my allocation to SPY and reduce my allocation to cash. We are now in the unfavorable months for the stock market; June-October. I just try to follow price and the trend. Right now, the trend for equities and bonds remains down. I will monitor the markets for the month of September and then reallocate, if necessary, at the end of the month.

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