Market insights and analysis

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

1st 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 U.S. stock market indexes finished mostly lower last week. The Dow Jones Industrial Average lost 0.5%, the S&P 500 Index slipped 0.1%, and the NASDAQ Composite fell 0.3%. In contrast, the Russell 2000 small-capitalization index gained 0.6%. The 10-year Treasury bond yield fell 2 basis points to 1.555%, leaving bonds flat for the week. Spot gold closed the week at $1,777.20, up $0.69 per ounce, or 0.04%.

Stocks

Stocks continued to fly high, as both the S&P 500 and NASDAQ 100 hit all-time new highs last week.

With over 50% of American adults having received at least one shot of their COVID vaccinations (and many more having already achieved immunity from having had the virus), the prospects of the economy finally fully opening up seems closer. This has spurred more economic activity in not only industries benefiting from the pandemic but also in the travel and entertainment industries.

New claims for unemployment benefits hit a pandemic low last week. In addition, the Composite Index of Leading Indicators reported a 1.3% jump in its March report, beating economist predictions. Earnings announcements made by early first-quarter reporting companies outperformed analyst expectations, as well. Over 80% have hit this mark, and many of the major tech companies are scheduled to report this week.

Even the negative economic news that arrived last week had a positive tilt. New home sales fell to a seven-month low. But this was due to a supply shortage, with demand for new homes soaring as virtual employment has made life in different environs more obtainable for many.

Tax hikes continue to command a large portion of the financial talk. Last week, the president proposed a capital gains tax hike that could see many Americans paying taxes of over 40% on their capital gains, up from 20% presently. Such rates would apply not only to stock sales but also to sales of small businesses and farms. Such talk, when combined with congressional and administration proposals for higher individual, corporate, and estate taxes, continues to concern many.

The capital gains tax spooked the market on Thursday (April 22). The market was enjoying another rally day until the news broke, and then so did the market. But by Friday’s close, the market had recovered and seemed poised to set even higher highs.

Of course, the stock market party has to end at some time, if only for a pause. This week could bring that sojourn as our Political Seasonality Index peaks today (April 26). The Index then turns lower into a bottom on April 29 before a surge to a possible May peak on May 6. (The 2021 QFC Political Seasonality Index chart is available post-login through our Weekly Performance Report section under the Quantified Fund Credit category.)

Almost all sentiment indicators have hit new heights with the stock market highs. Yet another example can be found in the enthusiasm of small investors. The American Association of Individual Investors (AAII) Bullish Sentiment Index has registered its highest point since just before the first of two 2018 corrections. As a contrarian measure, small-investor enthusiasm has often registered high points just before a market pause or correction. This time may be no different.

Bonds

In the last month, the yield on the 10-year Treasury bond has tumbled about 10%. This has ignited the first bond rally of the year and follows losses greater than 20% in even longer-term maturities since early last August.

By last week’s end, the yield had broken down to slightly below its 50-day moving average. This ends the longest streak above its moving average since 1962. While this may extend the recent rally in bonds, it’s equally possible that its present level may turn out to be support and send rates bouncing higher. Not a bad time to grab a mortgage at suddenly lower rates than just a month ago.

The Federal Reserve continues to supply unprecedented liquidity to all of the markets. It added over $25 billion during last week alone. This helps not only bonds but stocks and even the long-suffering tangible commodities.

Gold

While gains were minor last week, gold has been rallying for more than a month now. This has been primarily due to the falling interest rates previously discussed and the continuing concern that Fed liquidity efforts and trillions of dollars of new federal spending will reignite inflation.

Tempering the move higher was the World Gold Council’s announcement that, for the first time since 2009, central banks around the world (which had been major purchasers of gold) had experienced a month of net selling. This may help explain the persistent longer-term downturn in gold since last August—although, I don’t believe it was a coincidence that the top in gold last August coincided with the bottom in interest rates or that the recent rally in gold matches the same period as the rally in bonds.

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 mostly bullish. Low volume in stocks at week’s end coming so close to a market high, however, is a concern. Such conditions have led to stock market weakness over the next two to five trading days. As mentioned previously, this coincides with weakness over the same period in our Political Seasonality Index. This has led our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure to the S&P 500 Index to back off to an 80% bullish reading after being leveraged during the recent rally weeks.

Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy has a 160% exposure to the NASDAQ, the Systematic Advantage (SA) strategy continues to be 120% 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) has a High and Falling reading, which favors gold returns over bonds and then stocks. This stage occurs about 13% 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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