Market insights and analysis

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

4th Quarter | 2021

Market insights and analysis


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

By Jerry Wagner

The major stock market indexes tumbled last week. The Dow Jones Industrial Average lost 1.8%, the S&P 500 Index declined 2.5%, the NASDAQ Composite fell 4.9%, and the Russell 2000 small-capitalization index dipped 2.9%. The 10-year Treasury bond yield rose 6 basis points to 1.405%, as its price weakened. Spot gold closed the week at $1,734.04, down $50.21 per ounce, or 2.8%.


As was the case three weeks ago, the S&P 500 last week retraced its recent gains, falling to support before rebounding. The NASDAQ 100 was not as fortunate, as it breached its uptrend line to the downside. This reflects the market rotation away from tech stocks that has been occurring this year.

Economic reports continued to provide upside surprises, notably in housing and manufacturing, as 24 of the 35 published reports last week outperformed economist expectations. Economic reports have been beating economist estimates for six months in a row. In February, the net number of beats versus misses was positive as well, after netting 12 positive reports in January.

COVID hospitalizations and deaths have continued the downturn begun in December as vaccines, monoclonal antibody therapeutics, and seasonal improvements kick in. While there was a pause in the vaccination administration in the early days of the new administration, supplies are ample and have even begun to surge higher.

We remain in earnings reporting season, and company earnings reports continue to beat analyst estimates by a near-record margin. However, with about 25% of this quarter’s reports coming last week, there was a noticeable decrease in companies beating earnings estimates among the later filers. This brought the beat average this quarter down from above 80% to 76.05%. Revenue beats remained strong at 75.54%.

Unfortunately, individual stock prices have not reflected the better earnings so far this quarter. On quarter reporting day, stocks beating earnings estimates have actually fallen on average. This never happens! As I warned three weeks ago, this may be a cautionary flag signaling more weakness in the stock market to come.

Still, most intermediate-term trend indicators remain positive. The excesses in investor sentiment have been tamped down somewhat by the mild correction that has occurred so far. However, with the steepest yield curve since December 2016, investors need to remain wary in the short term.


The repeating rising and falling pattern in the yield on the 10-year Treasury bond that had extended back to August was very much muted three weeks ago. The declining phase lasted only a few days. The market’s price undulations were replaced with a steepening curve. Yields have accelerated to the upside and bond prices have tumbled.

10-year bonds have lost 4.4% over the last 141 trading days. While that seems like substantial volatility for bonds, it is just an average correction in the bond market. As we witnessed in the ’80s, bond price declines can get much worse.

The Federal Reserve governors insist that they are maintaining a dovish posture on interest rates and will give leeway to some inflationary gains to provide support for a still weak labor market. However, the bond market seems to fear the massive stimulus action from the Fed, the fiscal giveaways proposed in Congress, and the logical conclusion that inflation may not be too far behind.

One side will triumph over the other, but it seems that by week’s end all participants had agreed that a pause in the drive to higher rates was overextended. A rate correction and a bond price rally seems the likely outcome in the very short term.


Ever since interest rates began to climb in August, gold prices have been flat to down. Last week’s downturn continued that trend. Fear of rising inflation has not been able to buck the interest rate trend.

There certainly has been plenty of evidence that inflation is back. Last month’s cost of living measures were uniformly higher and above expectations, with the lone exception of the core consumer price index (CPI). In last week’s manufacturing data, it became apparent that that sector of the economy is facing substantial inflation.

Should inflation continue to inflate and a bond rally with falling yields develop, gold might begin a rally of its own at last.

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 now bearish, but improving. Responding to the recent correction, the very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure to the S&P 500 Index has risen to 160% as it expects a contra-trend reversion to the upward-sloping mean.

Our Political Seasonality Index (PSI) was positive until the close of February 16. At that point, it wisely suggested a move to cash. However, that bearishness ended at the close of February 23, when the strategy moved back into the stock market. The PSI remains bullish until a top on March 9. (The 2021 PSI chart is available post-login through our Weekly Performance Report section under the Domestic Tactical Equity category.)

Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy has a 60% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 137.5% 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 80% 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 stock 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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