Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

4th Quarter | 2021

Market insights and analysis


Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By Jerry Wagner

The major stock market indexes finished to the downside last week. The Dow Jones Industrial Average lost 6.5%, the S&P 500 Index fell 5.6%, the NASDAQ Composite slipped 5.5%, and the Russell 2000 small-capitalization index lost ground at a 6.2% rate. The 10-year Treasury bond yield rose 3 basis points, causing Treasury bonds generally to fall. Last week, spot gold closed lower at $1,878.81, down $23.24 per ounce, or 1.2%.

For October, the S&P lost about 2.8%, the NASDAQ lost 2.3%, 7-10 year bonds lost 1.4%, and gold lost 0.5%. There literally was no place to hide.

Still, the year-to-date numbers through October 29 for the three major asset classes are positive. While the S&P is up only about 3%, bonds have gained almost 10% and gold has recorded an advance of more than 23%.

After putting in the worst week before a presidential election ever, and the worst week since the COVID decline, the S&P 500 Index sits at about the same level as it did at the time of the September lows. This is an area where chart-watchers would expect a bounce. And we did secure a rally on the Monday before Election Day.

The blame for the stock market’s weakness last week continues to be placed on the same culprits that have been hanging around all of this fall: stocks failure to rally on great earnings reports, rising COVID cases, new shutdowns overseas, and—of course—the election. Regarding the latter, be sure to check out our Special 2020 Election Update. Part 2 of the update will be published later this week.

Perhaps expectations of Trump’s promised V-shape recovery were too high. Even as his promises come to pass, the market has failed to return to rally mode. Economic reports are still being reported at levels beyond economists’ expectations and in record numbers.

The GDP third-quarter gain of 33.1%, when 32% was expected, is just one example. After the largest increase in history, we are within 3.5% of matching our nation’s highest GDP number, which was achieved in last year’s fourth quarter.

Similarly, earnings reports are also continuing to beat analysts’ expectations. The beat rate is at extraordinarily high levels. Over the last three months, 79% of reporting companies have beat their earnings estimates, 70% have beat their sales numbers, and an unheard-of 33% net future guidance number was achieved (the average net number is -3%).

Overshadowing the market's elation with the economic and earnings reports continues to be the media drumbeat on rising COVID cases. Spain, France, and now the U.K. have increased their lockdown measures, even as most of the EU countries already trail the U.S. in economic and stock market recovery.

There is a fear that increasing cases here will cause new lockdowns in the U.S. Fortunately, so far, our case numbers are rising at a much lower rate than in Europe.

While rising cases here are concerning, they are understandable. We are testing more people than the EU countries or anyone else for that matter (more than 1.2 million per day). The great bulk of positive cases are among younger people where the incidence of death is extraordinarily low (hence the failure of the hospitalization and death rates to climb anywhere close to the levels they registered in the spring).

Finally, it has been underreported that the number of positive COVID cases is not the number of COVID infected individuals. Every COVID test taken by a COVID patient trying to ascertain whether they are still infected is counted as another COVID case.


Bonds have also returned to levels reached during their last downturn. But on Friday (October 30), they reversed direction and now appear to be rallying. It is noteworthy that the bounce occurred at a level above the previous low, marking the first time we have not fallen to a lower low since bonds began their slide early in August.

It is also worth noting that last week when stocks were falling, bonds also tumbled. This is reminiscent of the same co-movement experienced in the COVID decline back in March. This is relatively rare. Since 1962, Treasury bonds have fallen on a day when stocks fell by more than 3% only 24 times. But, like last month, such an occurrence has usually happened when the market was near the end of a decline, not at the beginning.


Gold continues to suffer from technical price weakness and a rising dollar. Here, too, COVID has been blamed, but the argument is unconventional. Because the U.S. economy is doing better than the European economies and our rate of COVID cases is lower, the U.S. dollar has been perceived as a stronger currency. When the currency is strong, gold tends to decline.

But as we have seen with U.S. stocks and bonds, gold has returned to its earlier lows. It is not hard to imagine that it, too, is due for a bounce.

The indicators

Both sentiment and seasonality readings are mixed. Our Political Seasonality Index signaled a buy back into stocks on October 29 but suggests a two-day exit commencing on November 5. So far, stocks are following the same pattern as 2016: a down week before Election Day followed by a Monday and Tuesday rally.

But what does this behavior tell us? Does it indicate a Trump victory or a change in parties controlling the presidency? Both occurred in 2016. Only time will tell what the message is.

The short-term trend indicators we monitor remain negative. And the very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure, which had switched to zero, now stands at 40%.

Most of our intermediate-term tactical strategies have moved to unleveraged exposure. Our Volatility Adjusted NASDAQ (VAN) and Self-adjusting Trend Following (STF) strategies are both 80% exposed to equities, our Classic strategy is in a fully invested position, and our Systematic Advantage (SA) strategy is 125% invested. VAN, SA, and STF can all employ leverage—hence the investment positions may at times be more than 100%.

Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure shows that we have returned to a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive monthly GDP reading). This is due to the 33.1% increase in GDP in the advance indication of third-quarter GDP, reversing the 31.4% COVID-inspired decline in the second quarter. Normal is one of the best stages for stocks, with limited downside. Gold has generated a higher return in this stage but with more volatility. Bond returns tend to be muted but positive. Since 2002, the economy has been in a Normal stage 60% of the time.

Our Volatility composite (gold, bond, and stock market) is still showing a High and Falling reading, which favors gold over bonds and then stocks, although all have positive returns in this regime stage.

Stocks, bonds, and gold are all at levels that should support a bounce higher. But November 3 is Election Day. And we all remember 2016. We shall see.

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