Market insights and analysis

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

3rd Quarter | 2020

Market insights and analysis

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

By Jerry Wagner

The major stock market indexes finished mixed last week. The Dow Jones Industrial Average lost 0.7%, the S&P 500 Index fell 0.8%, the NASDAQ Composite rose 0.2%, and the Russell 2000 small-capitalization index rose 2.4%. The 10-year Treasury bond yield fell 7 basis points, and bond prices were up slightly. Last week, spot gold closed at $1,870.99, down $18.21 per ounce, or 0.96%.

On the weekend financial talk shows, there was talk of a “vaccine floor” to the stock market. This refers to the fact that over the last two weeks, each time stocks have started to fall, another vaccine announcement has been made and stocks have rallied higher. However, rather than thinking of it as a floor, I think it has been a ceiling. Each rally has quickly run out of steam, and no new high has been made by the S&P 500.

On a larger scale, the chart above shows that this latest back and forth of the index has been mirrored by a bigger period of consolidation that stretches back to the September 2 market high. The recent market high on November 16 provides the top of this consolidation.

A breakout above this consolidation seems likely—although, I would not be surprised if, after an assault this week, the next attack does not come until mid-December when year-end seasonality kicks in.

Thanksgiving week is normally very bullish except for Monday. When the market is up 5% or more in November (as it is this year), the week has been up 90% of the time. Unfortunately, the next week is down two-thirds of the time. Little wonder that our Political Seasonality Index will issue a sell signal this Friday (November 27).

There certainly has been a positive economic backdrop for a stock market rally. Positive surprises in indicators such as industrial production, housing, and capacity utilization outnumber negative surprises, such as those in retail sales, 13 to 8 (even the “disappointing” Retail Sales figure set a new all-time high). With 30 more reports this week, there is plenty of ammunition to fuel a move higher.

Still, market breadth has almost no more room to go higher, and we remain in overbought territory in the short term. Yet the advance/decline line and the NASDAQ have both moved up at a greater rate than the S&P, with the former setting two new highs last week. This usually leads to higher prices.

All sorts of stock classes have suddenly shown signs of life, as the market tries to accept the good news that Project Warp Speed has delivered and place the pandemic market behind it. Small caps have finally hit a new high, the first since the summer of 2018! Value stocks have been outperforming growth stocks, while international markets have perked up, with most outperforming the S&P this month.

Yet the pandemic has definitely not gone away, as I found out last week when my wife tested positive. She is doing better now, but only after my taking her to the hospital on Friday. While the rising case numbers have many explanations, the turn higher in hospitalizations and deaths, although not to spring levels, causes continued worry and a headwind for stocks.

Bonds

The Federal Reserve has continued its stimulus policy with the largest purchases of bonds and ETFs in history. This caused its balance sheet to grow to almost $6.5 trillion—up about $82 billion last week alone. Yields have been supported by their 50-day moving average (the blue line), which, as you can see in the chart, has edged unrelentingly higher.

As the 10-year yield neared its 50-day moving average today (November 23), it reversed direction right on cue and moved higher. Another leg up in yields will send bond prices lower over the near term.

Gold

Gold has continued its slide in price that commenced at the end of July. At first, the culprit was rising interest rates. Higher interest rates discourage gold investment because they increase the opportunity cost of storing dollars in gold instead of interest-bearing securities.

Like stocks, gold has been bouncing up and down off long-term support. Unlike stocks, gold’s support line seems to be breaking down. Today (November 23), gold broke below its previous short-term low. It has tumbled to its lowest price since July.

Since this has occurred with a falling dollar, gold bugs are placing all of their bets on rising inflation. This is believed to be the natural result of the unprecedented infusion of dollars from the Federal Reserve.

The indicators

All of the short-term trend indicators we monitor for stocks remain bullish. The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure remains at 80%. Our Political Seasonality Index, adjusted for the election results, is long until November 27 and then turns bearish until December 15. (Our Political Seasonality Index is available post-login in our Weekly Performance Reports section under the Domestic Tactical Equity category.)

Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy has a 140% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 143.75% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy remains 200% invested. VAN, SA, and QSTF 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 are in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive monthly GDP reading). This occurs about 60% of the time and favors gold and then stocks over bonds—although, in this stage, gold carries a substantial risk of a downturn.

Our Volatility composite (gold, bond, and stock market) is showing a High and Rising reading, which favors stock returns over gold and then bonds. This stage occurs about 23% of the time and is a stage of medium returns for all asset classes but with substantial volatility for all but bonds.

All of us here at Flexible Plan wish you and your family health and safety over this week of Thanksgiving and into the future. As I told David Wismer in his article today,

“It’s hard to block out the 24/7 news; it seems that, wherever we are, a radio or TV drones on in the background telling us how many problems we have and the difficulties to come. In a time of less-intrusive media than ours, an earlier generation realized that we all needed a day where, instead of focusing on our worries, we needed to be able to focus on that for which we should be grateful. Thanksgiving is the day set aside for this in our country. My staff and I join in taking this time to thank each of you for your trust, your patronage, and your friendship. We are thankful that we are able to be a small part of the American story and your lives. Happy Thanksgiving everyone. May you enjoy God’s blessings in the year ahead!”



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