By Tim Hanna Major U.S. indexes pulled back last week, experiencing record trading volumes and high volatility. The Russell 2000 small-capitalization index fell 4.4%, the NASDAQ Composite was down 3.5%, the S&P 500 decreased by 3.3%, and the Dow Jones Industrial Average lost 3.3%. The 10-year Treasury bond yield fell 2 basis points to 1.07%, as Treasury bonds rose for the week. Last week, spot gold closed at $1,847.65, down 0.43%. Stocks Last week, unusual price action in high short interest stocks received the majority of the media attention. But it was also a busy earnings week for the S&P 500, with over 37% of its market capitalization reporting quarterly results. Short squeezes in GameStop (GME) and AMC Entertainment Holdings (AMC) showcased the battle between short activist hedge funds and what are thought to be “retail” traders from Reddit and other message boards. During its January policy meeting last week, the Federal Reserve maintained rates and reiterated that the economic outlook remains uncertain. Federal Reserve Chair Jerome Powell stated that it will be some time before they begin tapering asset purchases, with some economists projecting after 2022. Gross domestic product (GDP) came in at 4.0% (within expectations), compared to 33.4% for the prior quarter. Bespoke Investment Group noted that when markets sold off and breadth deteriorated, it ended a very impressive streak in the percentage of S&P 500 stocks above their 50-day moving average. The percentage had been over 70% every day from November 9 until last Tuesday (January 26)—52 trading days, the longest streak since September 2009. Confirming our previous reports to you, the Bespoke team studied forward performance following such periods. If history repeats itself, we would expect volatility over the short term followed by above-average returns one year from now. Bonds Treasury yields decreased last week, finishing the week down 2 basis points (ending at 1.07%) on the 10-year Treasury. On the municipal-bond front, T. Rowe Price traders noted , “The municipal bond market produced relatively strong returns for most of the week. The constant demand for yield drove interest in municipals while supply underwhelmed, leading to a supportive technical environment.” Investment-grade corporates pulled back due to fiscal stimulus uncertainty and concerns with vaccine distribution. The high-yield market followed the path of equities as traders moved away from riskier asset classes last week. Gold Last week, spot gold closed at $1,847.65, down 0.43%. Traders moved to safety during rising volatility and uncertainty last week, favoring the U.S. dollar and Treasurys over gold. John Moncrief, active commodities trader at GoldPrice.org, states , “It’s perhaps understandable, as straight (Dollar-denominated) cash is historically the most direct opposite of equity market volatility; And it’s been relatively ‘cheap,’ to boot.” The following chart shows the relationship last week between gold (blue) and the U.S. dollar (orange). The indicators Our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure started and ended last week with 80% long exposure. Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy had a 120% long exposure to the NASDAQ on Monday, increased exposure to 140% long at Monday’s close, increased to 160% long at Tuesday’s close, and then decreased to 100% long at Wednesday’s close due to market volatility. The Systematic Advantage (SA) strategy is 143% exposed to the S&P 500, and our Classic strategy is in a fully invested position. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% exposed to start last week, decreased to 160% at Wednesday’s close, and decreased to 120% at the close on Monday (February 1). VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%. Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators , shows that we remain in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive monthly GDP reading). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for stocks, bonds, and gold. Gold tends to outpace both stocks and bonds on an annualized return basis in a Normal environment but also carries a substantial risk of a downturn in this stage. From a risk-adjusted perspective, Normal is one of the best stages for stocks, with limited downside. Our Volatility composite (gold, bond, and stock market) is registering a High and Rising reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003. It is a stage of medium returns for all asset classes but with substantial volatility for all but bonds.