Market insights and analysis

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

1st Quarter | 2022

Market insights and analysis


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

The major stock market indexes finished up last week. The Dow Jones Industrial Average gained 3.3%, the S&P 500 Index rose 3.2%, the NASDAQ Composite climbed 3.4%, and the Russell 2000 small-capitalization index rocketed 7.8%. The 10-year Treasury bond yield rose 1 basis point, as Treasury bonds were down in general. Last week, spot gold closed lower at $1,754.40, down $13.60 per ounce, or 0.7%.

The S&P is nearing its 200-day moving average (about 3,000). This often proves resistance if we are in a bear market rally and not at the beginning of a new bull market. Today’s (May 26) gap opening took us above the 3,000 level, but by the time the market closed, the S&P 500 was still about 9 points short. Such a failure has happened 11 times since 1962.

Only three of those times was the market higher a week later—and five times it was higher two weeks later. Like with gap openings after a holiday, the short-term effect historically has been weak follow-through.

Economic indicators remain very negative in absolute terms, but recent data seems to be improving. While we have over 38 million people unemployed (23.5% of the labor force here in the U.S.), the number of people applying for unemployment has fallen each of the last seven weeks.

At the same time, housing sentiment has shown a major increase, according to the NAHB survey. Although, the mortgage delinquency rate had its largest increase in history!

The purchasing managers indexes (PMIs) from countries around the world, including here in the U.S., have all traced the same pattern. After falling last month to new lows, they have each been bouncing strongly higher. Obviously, such optimism is encouraging to see from those whose job it is to anticipate the industry’s future.

The Federal Open Market Committee minutes show a Federal Reserve that remains cautious but ready to do whatever it can to maintain liquidity and place the economy back on its pre-COVID record track.

This certainly holds the possibility of reinflating the world, which could send both gold prices and interest rates higher (and bonds lower.) Yet, with rates at such a low level and prices actually falling, the usual negative stock market reaction has so far been stalled.

As reported last week, the recent earnings-reporting season was above average. Yet, as the season wore on, the percentage of stocks beating their estimated earnings performance declined. Still, when the dust for the period settled, the S&P 500 had gained just over 5%.

Although, historically, stock prices tend to rise over Memorial Day week, the performance has been mixed in years when the S&P 500 Index has been down 5% or more. This is but one of many historical patterns currently playing out—with mixed messages.

With the market having had its 15th worst start of the year through its first 100 trading days (-7%), the rest of the year has also been mixed. When stocks have fallen at least 5% at this point in past years, stocks were higher about 52% of the time while gaining on average just 1% the rest of the year.

At the same time, it has been 40 trading days since the March 23 market low. Since then, we have had one of the fastest recoveries on record, gaining 31% in that period. In the past when we have gained more than 25% in just 40 trading days, stocks have continued higher. Over the next month, prices were higher 80% of the time, by an average of 15.3% (median 10.4%). And each of those times, they were higher three and six months later!

Putting all of these patterns together, it seems like the market has been sending us the same message since near the end of April when the current rally began to move sideways—flat to down over the very short term and (in general) rally conditions as we move out in time.

Still, the short-term trend indicators we monitor remain positive, although the very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure has returned to 0% after participating in the previous gap-opening rally.

Similarly, our intermediate-term tactical strategies remain mixed: The Volatility Adjusted NASDAQ (VAN) strategy has finally moved back to a 0% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 93.75% exposed to equities, our Classic strategy is in a fully invested position, and our Self-adjusting Trend Following (STF) strategy remains 100% invested. VAN, SA, and STF can all employ leverage—hence the investment positions may at times be more than 100%.

The NASDAQ 100 Index has generated a “golden cross” chart formation, with its shorter-term 50-day moving average crossing above its longer-term 200-day moving average of daily prices. This is generally positive for the Index in the future, although the real story is in the quick recovery of the Index this year. It is one of the reasons our STF strategy, which exclusively invests in the NASDAQ 100, is positive for the year and one of our top-ranked strategies for 2020.

Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure shows that we are now in a Deflation economic environment (meaning a negative monthly change in the inflation rate and negative monthly GDP reading). Deflation is the worst regime stage for stocks and the only stage that is slightly negative for gold. Bonds seem to do the best in this stage. Since 1972, the economy has been in a Deflation stage only 3% of the time. Given the unusual impact of the virus on the economy, history may be less of a guide this time. We shall see.

Our Volatility composite (gold, bond, and stock market) is still showing a High and Falling reading, which favors gold over bonds and then stocks, although all have positive returns in this regime stage.

That’s it for this week. All of us here at FPI wish you health and safety in these trying times,


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