Market insights and analysis

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

2nd Quarter | 2022

Market insights and analysis


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 down last week for the seventh week in a row. This is the longest losing streak since 2001. The Dow Jones Industrial Average lost 2.9%, the S&P 500 Index fell 3.1%, the NASDAQ Composite dropped 3.8%, and the Russell 2000 small-capitalization index gave back 1.1%. The 10-year Treasury bond yield fell 13 basis points to 2.788%, sending bond prices higher for the week. Gold futures closed the week at $1,846.17, up $22.56 per ounce, or 1.88%.


Last week was challenging for stocks. While the S&P 500 and the NASDAQ Composite extended their losing streaks to seven weeks, the venerable Dow Jones Industrial Average stretched its own streak to eight weeks. This ties 1923 for the most consecutive down weeks ever.

The chart above demonstrates that the S&P 500 has traced out a massive head and shoulders pattern. While it appears to have hit an intermediate downside goal on Friday (May 20), after a brief respite it can easily continue lower. Midday the Index was down over 20% from its December high. If it had closed at that level, declarations of an S&P 500 bear market would have been universal.

It did not do so, rebounding just enough on Friday afternoon to avoid that label for now. As the 50-year chart below illustrates, hitting that level now would be a bit early in the long-term history of similar declines.

On average, the Index has taken 100 trading days more to accomplish this. But if and when it does occur, we could be within another 100 days of the end of the bear market. However, that short period has usually brought an additional 16% in losses on average.

While the S&P 500 appears to have put off a bear market declaration with its Friday reversal, that is not the case with the tech-heavy NASDAQ. As the chart below shows, the NASDAQ has already exceeded the 20% bear market boundary and gone on to eclipse the 30% mark. However, it appears that a short-term bottom may have formed here as well. This too could provide the basis for a bounce this week.

The primary motivation for the decline in stocks has been investor focus on inflation and the possibility of a recession.

While the CPI recently declined a bit month over month, the decline was less than expected and most other price gauges (see the chart of gasoline prices in the Gold section below) show no signs of slowing. The persistence of a high inflation rate scares investors because it is supportive of the Federal Reserve’s determination to raise interest rates to combat it.

Rising interest rates slow growth. Slowing growth hinders earnings. Stagnant or declining earnings erode the value of stocks.

In addition, the Federal Reserve has made clear that its policy initiatives to fight inflation include ending and reversing its system open market account (SOMA) asset purchase program. This has been well advertised as coming, with a delivery date of June. It will remove the deep liquidity that has been fueling the stock run-up, and it may have started earlier than expected. While the SOMA was up a bit last week, a review of the last five weeks discloses that net market actions were negative. This also hurts stocks.

Of course, recessions have a similar effect. And investors definitely fear that the Federal Reserve action, when combined with high inflation and a worsening global economy besieged by war in Ukraine and COVID lockdowns, could spark just such an event. History tells us that bear markets that precede recessions tend to be longer (449 days versus 198 days) and steeper (-34.99% versus -28.22%) than recessions that don't precede recessions.

A recession forecast is by no means a done matter. Most bank forecasts see little probability for such an occurrence. And most economic forecasters believe that the unexpected decline in the economy in the first quarter is not likely to be repeated in the second-quarter GDP report. Yet one reliable yield-curve inversion has already hit the recession alert level. Although, once it broke through, it quickly reversed direction. Still, it did signal a recession as being likely to occur within the next two years.

Recent economic reports have certainly not disabused anyone from thinking that the economy is slowing. In the last week alone, retail sales, regional manufacturing reports, a slowing housing market (existing home sales have fallen 13% in the last three months) and even the Index of Leading Indicators have all been weaker than economists’ expectations.

Last Monday, even China reflected this weakening. Economists forecasting results for the world’s second-largest economy were expecting mediocre growth, but Monday’s reports showed surprising declines across the board in Chinese economic activity.

Investor sentiment certainly has been negative. Practically every measure shows deep despair, and, being generally contrarian in nature, they are screaming “BUY!” While the oversold nature of the market breadth has not yet reached capitulation levels, markets are oversold and could support a bounce here. Month-end and holiday seasonality suggest the same.

Bottom line: A bounce in stock prices seems warranted between now and the end of the month. However, longer-term and intermediate-term indicators suggest that an ultimate bottom to the current—yes, I’m going to say it—“bear market” has not yet been reached.


In the face of rampant inflation and a more hawkish Federal Reserve, interest rates reversed direction and headed lower two weeks ago. Yields have retraced about 10% of their rise since last August. This has meant good news for bond investors and most of our strategies, which have sought defensive positions to escape from stocks.

Long-term Treasury bonds did bounce higher, as they hit a resistance point stretching back to 2018. Unfortunately, this minor reprieve may soon be over. As can be seen in the chart at the beginning of this section, yields tend to trade in a mean-reverting channel bounded by their 50-day moving average. As we near that level, a reversal back to the upside seems likely.

Reflecting the downturn in stocks, high-yield bonds (represented here by the HYG ETF) have also been declining. If we see the bounce this week in stocks that our short-term stock indicators are suggesting, this descent may be reversed in the high-yield sector as well. In addition, we are nearing a long-term resistance point.


Gold has been one of the bright spots in the financial markets this year. Its ability to diversify investor portfolios is the big reason we make it available for use in so many of our portfolios. It is an integral part of our defensive portfolio in place of only using cash. It tends to move in the opposite direction of the stock market at key crisis points.

Also, as the price of goods moves higher, gold has proven to be a store of value. This means it can help protect investor purchasing power when prices of commodities (like gasoline, shown below) are marching higher.

Until last week, rising interest rates and a soaring dollar had reversed gold’s bull market price rise. However, last week, the yellow metal reversed direction and began advancing once again.

Gold usually moves in the opposite direction of the dollar. As is clear from the chart below, the dollar has been soaring since its early-March breakout. However, the ascent had become almost parabolic, turning its price line almost straight up. As we suggested weeks ago, this was not sustainable, and a flattening out or pause in the dollar’s advance was likely. That began about a week ago, and gold has benefited.

Flexible Plan Investments (FPI) 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 we watch are mostly negative. However, short-term patterns favor a one-to-five-day bounce after Friday’s comeback action. Our very short-term-oriented QFC S&P Pattern Recognition strategy has once again become invested in stocks at 1.6X.

Our Political Seasonality Index has been out of the market since the close on May 9 and will stay there until May 24. After two days invested in stocks, it will move on May 26 to its defensive position before returning to stocks on May 31.

Through Friday (May 20), our QFC Political Seasonality Index strategy has gained about 2% this year. In a recent ranking of third-party strategies, it was the top-ranked domestic equity strategy among a list of all types of strategies that were profitable in the first quarter of 2022. Flexible Plan had eight other strategies on the list as well.

The QFC Political Seasonality Index strategy is included in our QFC Multi-Strategy Explore portfolio within Special Equities and mostly uses our subadvised Quantified Common Ground Fund (QCGDX) for equity market exposure. (Our QFC Political Seasonality Index—with all of the daily signals—is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

FPI’s intermediate-term tactical strategies are very mixed. The Volatility Adjusted NASDAQ (VAN) strategy is 60% inverse to the NASDAQ, the Systematic Advantage (SA) strategy is 30% in stocks, and our QFC Self-adjusting Trend Following (QSTF) strategy has an exposure of 0% (as of the close on April 25). VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

On Tuesday, May 3, 2022, Classic generated a sell signal and a move into defensive asset classes. Due to platform limitations, a few products may have held off selling until a required minimum hold was registered.

At the beginning of May, our All-Terrain indicator, one of Flexible Plan’s Market Regime Indicators, registered a major change. Our Growth and Inflation measure now shows that we are in a Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative monthly GDP reading).

This occurs only about 9% of the time and favors gold and then bonds over stocks. It is a time of moderate risk for gold, but stocks have their second-worst drawdown of all the regimes. Only the Deflation economic environment stage has seen lower drawdowns for stocks. The last time we saw this condition was in the late 1970s and early 1980s, when substantial shrinkage of the Case/Shiller P/E occurred, driving the ratio down to as low as 7 times earnings

Our S&P volatility regime is registering a High and Rising reading, which favors equity over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2000. It is a stage of lower returns and higher volatility for all three major asset classes.

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