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.

Most of the major stock market indexes finished the week with what has been rare of late—back-to-back weeks of gains. The Dow Jones Industrial Average grew 2.2%, the S&P 500 Index rose 2.9%, and the NASDAQ Composite rallied 6.1%. The Russell 2000 small-capitalization index, the best performer the previous week, lost ground last week, falling 1.4%. The 10-year Treasury bond yield fell 7 basis points, sending Treasury bonds generally higher. Last week, spot gold closed lower at $1,682.80, down just $0.91 per ounce, or 0.05%.

The rally from the March 23 lows continues, but where will the market go next? In this unprecedented time, we may still gain some insight from the past. Looking at the 25 times the S&P 500 in its 90-plus year history has hit a 52-week market low and then rallied at least 5% (it’s a 30% rally this time), an interesting pattern emerges.

Although 17 of those occasions saw no return to new lows (the successful rallies), and eight did see new lows eventually appear (the failed rallies), in almost every case at about the end of the 20-day period a pause or downturn ensued. While there were two cases where stocks just kept rocketing higher, it is worth noting that we are at that 20-day point now, and history tells us a pause is likely.

Additionally, as the chart below shows, we have had a 50% retracement of recent market losses. This is often where resistance appears.

Earnings reports for the first quarter have just barely started to surface. Early returns show that analysts are lowering expectations more than the companies themselves, and while earnings reports so far are not beating expectations, surprisingly, sales are.

In terms of economic reports, the results have been as bleak as expected. Manufacturing, housing, and retail sales reports for the week were at record low levels. This is not expected to improve any time soon.

In response to this, the Federal Reserve has expanded its liquidity efforts to unprecedented levels. An expansive Fed policy has been positive for future stock returns in the past. In addition to pointing stocks higher, yields on bonds are now back at their lowest levels on record, and bond holdings continue to provide a reliable safe haven for portfolios this week as stocks have weakened.

It’s difficult to believe that anything could knock the virus stories off the front page, but oil prices have managed to do it three times. First, when Saudi Arabia and Russia conspired to increase production, likely to undercut U.S. producers. Then, in the midst of the virus crisis, President Trump negotiated a reduction in production with those nations, Mexico, and the OPEC-plus group to try to remove this artificial oversupply pressure on prices.

Now, with a worldwide lockdown creating a true demand crisis, the price action in oil futures markets makes it clear that the world is saturated with oil. There is no place left to store it while the world waits to restart its demand for oil. Instead of buyers having to pay for their oil, those who can still store it are saying they want to be paid to take it. As a result, the price of oil for immediate delivery fell to negative levels this week. That’s big news!

May 2020 WTI Crude Oil Futures—Negative $40 per barrel

Producers can’t give it away!


Because this has never happened before, there are no precedents to look back upon to truly evaluate the effects of the price collapse. The closest we can get are times of big (greater than 10%) drops in oil prices. Of these, it should be somewhat encouraging to stock investors that out of the 13 instances when this has happened, stock prices have moved higher one week later 11 times. As SentimenTrader.com reports it, the S&P was also higher a month later seven times, three months later six times, and one year later eight times, with median one-year returns of 20.1%.

More and more it seems that, looking at the studies of short-term price moves, the historical evidence seems to be pointing to this being a time of short-term weakness (perhaps until the end of May when seasonality turns more positive) and also longer-term opportunity.

Still, the short-term trend indicators I monitor remain positive, while longer-term measures continue to show the obvious—that we are still in a bear market. Our short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure continues at 0%.

Similarly, our intermediate-term tactical strategies are mixed: The Volatility Adjusted NASDAQ (VAN) strategy remains in inverse funds with a negative 60% exposure to the NASDAQ, Systematic Advantage (SA) is 73% exposed to equities, Classic is in a fully invested position, and our Self-adjusting Trend Following (STF) strategy is back to 100% invested. VAN, SA, and STF can all employ leverage—hence the investment positions may at times be more than 100%.

Speaking of STF, it is worth noting that the NASDAQ 100 Index upon which STF trading is based has already returned to a positive year-to-date return (about 1%). STF has also rallied into positive territory and is now up over 6% year to date, after maximum fees.

Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure still shows that we are in a Normal economic environment (meaning a positive inflation rate and positive GDP), but the GDP measure may change shortly. Our Volatility composite (gold, bond, and stock market) is now showing a High and Falling reading. This is gold’s best regime stage and is moderately positive for bonds and stocks as well. Volatility, while still higher than normal, is a bit lower for stocks and gold than was the case in the last regime stage. Stock does continue to be the highest of the three asset classes, however.

Here’s hoping that this too shall pass … soon.

All the best, and wishing you health and safety in these trying times,

Jerry



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