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 soared higher last week. The Dow Jones Industrial Average gained 3.9%, the S&P 500 Index rose 4.6%, the NASDAQ Composite climbed 6.0%, and the Russell 2000 small-capitalization index increased 7.7%. The 10-year Treasury bond yield rose 10 basis points to 1.168%, as its price weakened. Spot gold closed the week at $1,814.11, down $3.54 per ounce, or 1.82%.

Stocks

After a brief pause that saw the S&P 500 and some other indexes fall to their 50-day moving average support level, stocks moved strongly higher four of the five days last week, attaining new all-time highs by Friday. Economic reports continued to provide upside surprises, notably in housing and manufacturing, as 20 of the 30 published reports last week outperformed economist expectations.

In addition, company earnings reports continued to beat analyst estimates by a wide margin. Of the 585 companies already reporting, over 82% exceeded pre-earnings estimates, one of the highest readings in history. And 77% had better revenue figures as well (best since 2004). While the indexes appear to reflect these positives, individual stocks of the issuing companies failed to advance as much as they have historically following such good news. In the past, this disparity has sometimes presaged a broader correction.

The move higher this week made it clear that the uptrending price channel of all of the major U.S. equity indexes continues intact. Virtually all trend indicators are positive as well. COVID hospitalizations have continued the downturn begun in December as vaccines, monoclonal antibody therapeutics, and seasonal improvements began to kick in.

It’s all positive, right? Well, the concern is that it may be too positive. Measures of consumer sentiment about the stock market are at or near all-time highs. Option trading is registering major volume on the call side, while IPOs and margin trading are at or near record levels. As we have discussed previously, these are all contrarian signals that can indicate a market top is near. So, again, “Let’s be careful out there.”

Bonds

As I have explained in this update over the last few months, Treasury yields have exhibited a repeating rising and falling pattern that now extends back to August. Yet even as they created this narrow band of values, it can’t go without noticing that the band consistently is marching higher. Although we have now started the contraction phase again, where we should see yields fall and prices rise for a few days, the bottom of the yield band is closing in and a reversal to the upside is probably not far away, especially since the price trend seems to be steepening.

Of course, the primary reason for the seemingly relentless rise in rates (and the resultant fall in bond prices) is the concern about the massive stimulus action from the Fed and the fear that inflation may not be too far behind. As we will likely find out at this week’s Federal Reserve Board of Governors meeting, there is no reason to believe that the Fed will decrease its support (of course, if it does, bonds will rally and stocks will probably plummet). Yet there are plenty of signs that higher inflation is brewing.

Gold

Since August, gold prices have been flat to down. Last week’s downturn was a part of that trend. Gold will likely continue to face headwinds as long as interest rates are rising. It needs a falling dollar and rising inflation to be able to buck the interest rate trend and move to new highs. In contrast, we saw a rising dollar last week, as evidenced by the falling value of the euro against the dollar.

Still, this week the price of gold backed away from being on the precipice of a death-cross sell signal (a lower 50-day moving average than its 200-day moving average). It did so as most sentiment and fund flow numbers were near or at record low levels for the yellow metal and gold stocks in general.

Just as these sentiment measures are contrarian for stocks, such is the case for gold, and a contrarian sentiment rally seems in order. The rally, however, may be a brief one unless one or more of the big three—the dollar, interest rates, or inflation—become more supportive.

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

The indicators

The short-term trend indicators for stocks that we watch are solidly bullish but looking a bit “toppy.” The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure has maintained its 78% exposure to the S&P 500 Index.

Our Political Seasonality Index (PSI) is positive until the close of February 16. (The 2021 PSI chart is available post-login through our Weekly Performance Report section under the Domestic Tactical Equity category.)

Still, our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy has a 100% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 143.7% 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 160% 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 Rising reading, which favors stocks returns over gold and then bonds. This stage occurs about 23% of the time and is represented by decent returns for all asset classes, though with higher-than-average risk for gold and stocks.



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