Market insights and analysis

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

2nd Quarter | 2021

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 mostly lower last week. The Dow Jones Industrial Average lost 0.6%, the S&P 500 Index fell 1.0%, and the NASDAQ Composite declined 0.7%. In contrast, the Russell 2000 small-capitalization index advanced 1.0%. The 10-year Treasury bond yield fell 7 basis points, and bond prices were up slightly. Last week, spot gold closed at $1,862.73, up $23.87 per ounce, or 1.3%.

Stocks

We had only one up day last week as the weakness forecast for stocks by our Political Seasonality Index came to pass. The stalled stimulus talks seem to be receiving most of the blame, although there has been some weakness in the economic reports. The shutdowns in the Northeast, Rust Belt, and West Coast have taken away some of the recovery momentum. Still, the remaining states, the housing industry, and the businesses (like ours) that are able to operate virtually continue to carry the economy higher.

On the economic front, while housing stayed strong, most of the manufacturing, service, and consumer economic reports published in November have been weaker than the previous month. So far (with November reports only partially released), the number of weaker-than-expected economic reports has topped those that have come in stronger.

However, it should be pointed out that most of these “weaker” reports have been positive and continue to suggest a recovering economy. It seems that expectations have finally caught up with what has been a fairly strong performance by the economy since the pandemic lows.

Bonds

Bonds continue to trace out a series of short-term cycles, moving like the tide from highs to lows. Yields continue to be supported by the 50-day moving average. However, since bond prices move in the opposite direction of their yields, that average has also been providing a cap to any advance in bond prices. If the ebb and flow continues, it appears that the recent downturn in rates (and rally in bonds) may be nearing an end.

The Federal Reserve has continued its stimulus policy with the largest purchases of bonds and ETFs in history, increasing its balance sheet by about $16 billion last week alone to a total of almost $6.5 trillion. This could keep the lid on rates in the intermediate term, and Fed stimulus is certainly positive for stocks as well.

Gold

Since September, gold has seen only four weeks with rising prices. Fortunately, one of those weeks was last week as gold prices had their second-best week of the quarter.

Yet, overall this quarter, gold has continued the slide in price that commenced at the end of July. One of the culprits has been rising interest rates. As we see in the previous bond graph, despite the rising and falling short-term trends, the blue line representing the moving average seems to just keep moving higher. Higher interest rates discourage gold investment because they increase the opportunity cost of storing dollars in gold instead of interest-bearing securities.

Gold bugs continue to bet on rising inflation and a falling dollar. This is the normal result of the positive type of stimulus coming 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 has upped its exposure to the S&P 500 Index to 200%, its highest level. Our Political Seasonality Index, adjusted for the election results, has been bearish since November 27 but now suggests a rally commencing on the close of December 15 and remaining until the end of the year at the very least. (Our Political Seasonality Index is available post-login in our Weekly Performance Report 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 180% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 125% 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 gold carries a substantial risk of a downturn in this stage.

Our Volatility composite (gold, bond, and stock market) is now showing a High and Falling reading, which favors gold returns over bonds and then stocks. This stage occurs only about 13% of the time and is a stage represented by decent returns for all asset classes and with moderate volatility.

All of us here at Flexible Plan wish you and your family health and prosperity in this holiday season and in the new and very welcome year of 2021.



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