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 Tim Hanna

Major U.S. stock market indexes were up last week. The S&P 500 increased by 0.61%, the Dow Jones Industrial Average was up 0.66%, the NASDAQ Composite rose by 0.48%, and the Russell 2000 small-capitalization index gained 0.77%. The 10-year Treasury bond yield fell 4 basis points to 1.55%, taking Treasury bonds higher for the week. Spot gold closed at $1,891.59, down 0.64%.

Stocks

In a holiday-shortened trading week, “meme stocks" captured news headlines while markets marched higher. Investors continued to assess the strength of the economic recovery as employment data sent mixed messages.

Non-farm employment change came in at 559,000, less than the 645,000 forecast. Unemployment claims were 385,000, slightly less than the 400,000 forecast. The unemployment rate registered at 5.8% on Friday, slightly below the 5.9% forecast. ISM Manufacturing PMI was 61.2, compared to the 60.8 that was forecast. ISM Services PMI was 64.0, higher than the forecast of 63.0.

With fundamental data delivering limited downside surprises this year, it’s important to monitor the technical landscape for the shifts in and strength of price trends. The good news is that the S&P 500’s uptrend is still intact, holding above support since the 50-day moving average was last tested in May.

The Bespoke Investment Group track all of the key U.S. index ETFs in their Trend Analyzer tool. Currently, all are rated as being in an uptrend. With the recent rotation between the Growth and Value styles, we’re now seeing an increased correlation between sizes and styles, all registering an uptrend. In such environments, it’s more important than ever to have dynamic, risk-managed strategies that monitor for and react to major trend changes.

Bonds

Treasury yields decreased last week, sending bond prices higher. The 10-year Treasury continued to hold below 1.60% as of the close of last week. The 1.60% support-turned-resistance level will be closely watched by technicians as they continue to estimate future inflation, its duration, and the overall impact on markets.

Fed Governor Brainard and Vice Chair for Supervision Quarles both stressed that the Federal Reserve is far from achieving its inflation and employment targets. The Federal Reserve has stated multiple times that they expect inflation to be transitory. However, Brainard and Quarles both mentioned that the Fed would act swiftly if the recent increase in inflation is more than transitory.

T. Rowe Price traders reported, “The corporate bond markets were relatively quiet. Investment-grade corporate bonds experienced relatively light trading volumes, and new issuance was in line with expectations. The high yield market was also fairly subdued, although our traders reported that news of progress in negotiations over a new infrastructure bill appeared to support sentiment, and outflows from below investment-grade funds subsided.”

Gold

Last week, spot gold closed at $1,891.59, down 0.64%. Gold pulled back last week following its very strong run that started from the early May breakout. The metal is now trading above its 200-day moving average, considered an initial line of support at current levels.

If prices continue to hold here or go higher, a golden cross (when the 50-day moving average crosses above the 200-day moving average) is on the horizon. Historically, a golden cross is interpreted as signaling a longer-term trend change to the upside.

Flexible Plan is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction almost nine years ago to track the daily price changes in the precious metal.

The indicators

Our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure was 200% long throughout last week.

Our intermediate-term tactical strategies are positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy started last week 120% long to the NASDAQ, changed to 140% long at Wednesday’s close, and switched to 120% long at Thursday’s close. The Systematic Advantage (SA) strategy is 90% exposed to the S&P 500, and our Classic model is in a fully invested position. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long throughout last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Flexible Plan’s Growth and Inflation measure is one of our Market Regime Indicators. It shows that we remain in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive monthly GDP reading). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for stocks, bonds, and gold. Gold tends to outpace both stocks and bonds on an annualized return basis in a Normal environment and carries a substantial risk of a downturn in this stage. From a risk-adjusted perspective, Normal is one of the best stages for stocks, with limited downside.

Our S&P volatility regime is registering a High and Rising reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003. It is a stage of medium returns for all asset classes but with substantial volatility for all but bonds.



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