In this month's article, I explain why I'm maintaining my allocation to the SPDR S&P 500 ETF (NYSEARCA:SPYARE) at 20%, adding a 20% position to the iShares Russell 2000 ETF (IWM), and increasing my exposure to 30% in the iShares MSCI EAFE ETF (EFA). The remaining 30% of my assets will be in cash.
First, let me review my retirement plan's performance in January. The market, as measured by the S&P 500 Index (SP500), rose 6,18% for the month. In my retirement plan assets, I underperformed the index, as my investment allocation gained 3,26% against a much stronger S&P 500 performance. My investment goal of preserving my capital was achieved, as I made money. I fell short of my second investment goal, which was to beat the S&P 500. Table 1 below shows my returns and allocations for the month of January, and Table 2 below shows my returns over the past 12 months.
I made changes to Table 2 below after receiving 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 have been if I had opened my account with $ 100,000 in my first article in this series and followed the allocation advice in my articles. The fifth column, $ 100,000 SPY, shows the returns from investing only $ 100,000 and keeping everything allocated to SPY. The percentage returns in the bottom row show that my strategy returned negative 7,79% over the past 12 months, and simply investing in SPY would have returned negative 8,18% over the past 12 months. Therefore, I outperformed SPY by 0.39% over the past 12 months.
Table 1 – Return on investments in January
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Table 2 – Return on investment in the last 12 months
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To revisit the purpose of this article series, my retirement account only allows me to purchase the following four exchange-traded funds (“ETFs”): iShares Core US Aggregate Bond ETF (AGGG), SPDR S&P 500 ETF (SPYARE), iShares Russell 2000 ETF (IWM), and iShares MSCI EAFE ETF (EFA). I can also hold 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 retirement plan assets. My moving average crossover system uses the 6-month and 10-month exponential moving averages to identify which of four ETFs to buy. If the 6-month moving average is above the 10-month moving average, the ETF is a buy. I call this pattern bullish alignment. When the 6-month moving average is below the 10-month moving average, the pattern is bearish alignment. When bearish alignment occurs, I don't want to hold that asset. See Chart 1 below for a long-term view of the S&P 500 using my moving average crossover system.
Chart 1 – SP 500 monthly index with 6/10 moving averages
www.stockcharts.com
You can see that the moving average crossover system provided some excellent long-term buy and sell signals that would allow investors to capture lasting movements in the index while avoiding costly drawdowns. Avoiding these costly drawdowns allows me to achieve my capital buffer target.
I use this strategy because I don't want to suffer a sharp decline in 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 argue that if these people had used a market strategy like the one I describe in this series of articles, they would have been able to avoid much of the decline during the bear market and, consequently, would have experienced less emotional distress during that period.
The following charts show the status of ETFs I can purchase in my retirement account.
Chart 2 – Monthly SPY with 6/10 moving averages
www.stockcharts.com
Chart 2 shows that SPY gained 6,29% in January. This is a good start to the year. Volume was lower than last month. SPY reflects where it was nine months ago. The market has been trading sideways since May 2022, but is showing signs of a new bull market. SPY looks more bullish than it has since late 2021. SPY is above its red 10-month moving average. January's close is the highest close in the last nine months. SPY closed above the descending trendline drawn in green. Both the red 10-month moving average and the blue 6-month moving average appear to be in an uptrend. The next bullish move for SPY is a crossover of the blue and red moving averages. Therefore, SPY would be in bullish alignment. As I've said in previous articles, I like to have some exposure to SPY for when the bear market ends and the next rally begins. The next rally may already have started in October.
Chart 3 – Monthly IWM with 6/10 moving averages
www.stockcharts.com
Chart 3 shows that small-cap stocks rose 9,82% in January. This has been the best-performing ETF I follow. Volume was lower than the previous month. Everything I said about SPY in Chart 2 can be said about IWM in Chart 3. IWM looks bullish to me.
Chart 4 – IWM:SPY Monthly Relative Strength
www.stockcharts.com
Last month, I mentioned that the IWM:SPY ratio could bottom. Further confirmation of this can be seen above. So far, it has held the bottom made in June. The report appears to have reached a higher high in October and now a higher low in December. For the second time in the last four months, the report closed above both moving averages. This is bullish. The information in Chart 3 and Chart 4 tells me that a 20% allocation to IWM is justified. Next, I need to see a moving average crossover that puts the ratio in bullish alignment.
Chart 5 – Monthly EFA with 6/10 moving averages
www.stockcharts.com
The EFA has the strongest-looking chart. Chart 5 shows that the EFA gained 9,00% in January. It closed well above both moving averages, which are now in bullish alignment. Foreign stocks are leading the new bull market.
Chart 6 – EFA:SPY Monthly Relative Strength
www.stockcharts.com
Chart 6 shows that the EFA:SPY ratio gained 2.55% in January. The report is now in bullish alignment. Thanks to this strong performance, I will increase my EFA exposure to 30% of my pension assets.
Chart 7 – Monthly EFA: IWM relative strength
www.stockcharts.com
Chart 7 shows that EFA underperformed IWM in January by 0.74%. The ratio closed above the green dotted line and remains above the highs reached earlier this year. These developments are bullish.
Chart 8 – Monthly ADD with 6/10 moving averages
www.stockcharts.com
Chart 8 shows that AGG gained 3.33% in January. For the first time in over a year, AGG closed above its red 10-month moving average. This is a bullish development. Both moving averages may now be rising. Let's see if this momentum continues.
Chart 9 – Monthly ADD: SPY Relative Strength
www.stockcharts.com
The AGG:SPY ratio in Chart 9 lost 2.78%, as AGG underperformed SPY in January. The report is trading in a consolidation pattern, moving sideways since mid-2021. The next step is for the report to post a series of increasingly higher highs and higher lows. Then the report could move into bullish alignment.
In summary, January was a bullish month for all four asset classes. All equity ETFs appear bullish. AGG also appears somewhat bullish. These bullish charts warrant more exposure, in my opinion. I'm increasing my EFA exposure to 30% and adding a 20% allocation to IWM. I'm maintaining my 20% exposure to SPY. I maintain a cash position of 30%, as SPY and IWM are not yet in bullish alignment. Once I see it, I'd be inclined to have all my money in the market. So far, the new year has started with a bullish start. We'll see if this bullish behavior can continue in February.
This article was written by
As an individual investor approaching retirement, I'm looking to build my financial resources to have a satisfying retirement. I'm interested in trading long and short, or at least using inverse ETFs, to take advantage of market downturns. Having long- and short-term trading strategies, proper execution of my trading plan, and absolute investment results are my goals. I see my articles as a way to stay focused on developing winning trades. I also hope to learn a lot from the feedback provided in the comments section.
Disclosure: I have/we have a long position in EFA stock through ownership of shares, options, or other derivatives. I wrote this article myself, and it expresses my opinions. I receive no compensation for it (except from Seeking Alpha). I do not have any business dealings with any company whose stock is mentioned in this article.
Additional information: I will also be purchasing IWM in the next 72 hours.
