Market insights and analysis

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

2nd Quarter | 2022

Market insights and analysis

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

Market Update 2/15/22

By Jerry Wagner

The major U.S. stock market indexes were mostly down last week. The Dow Jones Industrial Average lost 1.0%, the S&P 500 Index fell 1.8%, the NASDAQ Composite declined 2.2%, and the Russell 2000 small-capitalization index gained 1.4%. The 10-year Treasury bond yield rose slightly to 1.916%, sending bond prices flat to slightly lower for the week. Spot gold closed at $1,858.76, up $50.48 per ounce, or 2.79%.

Stocks

As I write this, uncertainty abounds in the financial markets. Russia seems poised to enter into a shooting war with Ukraine, and the Fed has already declared war on inflation. This means rates will rise, but how fast and how high is unknown.

With regard to the first concern, I remember the period before the Iraq War. Stock prices were falling until the shooting started. Then, in very quick order, stocks rallied and a new bull market began.

As to the second concern, it’s important to realize that there have already been 28 tightenings by other central banks around the world.

As the researchers at Bespoke Investment Group point out, the only times that we have seen this level of global rate hikes were in August 2008 and May 2011. The effect on the stock market thereafter was further price weakness in both cases. And now the Fed is preparing to pile on with rate hikes of their own.

As price seems to follow earnings, normally I would look to earnings for guidance to break the tie. More than 700 companies have already reported on fourth-quarter earnings. The beat rate (the percentage of companies reporting higher-than-predicted quarterly results) has been solidly over 70% for both earnings and revenues, yet both rates have been lower than in the 2021 reporting periods.

On a technical basis, stock index charts don’t get much worse. The late, great market technician, David Elliott, used to lecture on a chart formation called an “ice hole failure.” This occurs when the price of a stock or bond falls through its moving average, moves back to the level of the moving average, can’t find a way to stay solidly above that average, and then sinks even lower. This is exactly the pattern on the S&P 500 chart above.

In addition, all of the major stock indexes seem prepped for another negative pattern to appear. The NASDAQ seems destined to experience the so-called death cross (when the 50-day moving average crosses below the 200-day moving average), while the S&P appears to have some room for recovery.

In the same vein, David Kneupper’s NASDAQ Bottom Finder indicator has met the first requirement for an end to the current price weakness, with the measure falling below the 20% level. It now requires a move to above 35% to signal the all-clear. So far, stock prices have not obliged.

Bonds

As the chart above of the 10-year Treasury bond yield shows, interest rates continue to rally. Not only have they moved above their 50-day moving average but also their last four intermediate-term market highs. As a result, long-term Treasury bonds (TLT) have fallen over 11%.

Meanwhile, high-yield bonds have followed the equity indexes lower. As is usually the case, because of the higher interest rates earned, their decline has been more moderate than stocks in general. Yet, on Monday, the high-yield bond ETF reached the level of its December low and then promptly reversed higher. This suggests that both high-yield bonds and stocks may bounce higher in the short term as well.

Gold

Gold has not only remained above its 50-day moving average, but it has broken above its last intermediate-term high. With the terrible inflation numbers of December being once again confirmed by the January CPI reports, and the continued advances made by most other commodities, gold’s gains are understandable.

However, as we have consistently pointed out, the yellow metal has had to face the headwinds of a strong rally in the U.S. dollar. Typically, a rallying dollar leads to declining gold prices, and the last 12 months have generally been no exception.

Gold’s current turnaround has come not during a dollar decline but rather as the dollar's ascent has simply flattened out. Unfortunately, the chart below shows the dollar itself breaking above its moving average yet again. This may put added pressure on gold’s price, as will ascending interest rates. So far, gold’s safe-haven status in the face of substantial stock market volatility has helped overcome these bearish pressures.

Many have suggested that bitcoin is the new gold. However, as the chart below shows, it has not rallied as substantially as gold in the current crisis. Still, we would expect that it too will have its day in the sun once again. As a result, we have added the possibility of bitcoin trading to our prospectuses for both the Quantified Alternative Investment Fund (QALTX) and the Quantified Evolution Plus Fund (QEVOX). It may prove useful in the future.

Flexible Plan is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction more than nine years ago to track the daily price changes in the precious metal.

The indicators

The short-term-trend indicators for stocks that I watch have been in a bearish posture for some time. At the same time, our Political Seasonality Index has been bullish since February 9. It turns back bearish on February 16 before turning higher again on February 23. (Our QFC Political Seasonality Index—with all of the 2022 daily signals—is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

Our very short-term-oriented QFC S&P Pattern Recognition strategy has moved back to a 1.6X exposure to the S&P 500 Index.

FPI’s intermediate-term tactical strategies have been mixed. The Volatility Adjusted NASDAQ (VAN) strategy has -40% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 30% exposed to the S&P 500, and our QFC Self-Adjusting Trend Following (QSTF) strategy has an exposure of 100% invested. (VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.)

Classic continues in a 100% long position, except on a few platforms where trading restrictions require only monthly trading.

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 stage 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) has a High and Rising reading, with stock returns historically outpacing gold and then bonds. This stage occurs about 23% of the time. Stocks have the most downside risk but also the highest risk-adjusted returns. More volatility seems likely.



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