Market insights and analysis

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

3rd 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.

The major stock market indexes finished up this week. The Dow Jones Industrial Average gained 3.7%, the S&P 500 Index rose 3.0%, the NASDAQ Composite climbed 1.8%, and the Russell 2000 small-capitalization index rocketed 2.8%. The 10-year Treasury bond yield fell 1 basis point, as Treasury bonds were mixed. Last week, spot gold closed at $1,731.71, down $2.97 per ounce, or 0.17%.

This will be a quick report as we are at midweek already. This is the first week employees could return to FPI—if that is what they wanted to do. So we have been pretty busy preparing for them. We have been operating with all of our employees managing their tasks virtually. It has been a grand exercise, and I am confident you will agree with me that they performed magnificently. I am so proud of them!

We are still limiting travel in the field by our sales force, so please keep making those virtual appointments. You all have been great helping us out with your patience and flexibility. We are all better together!

Stocks

Stocks, as represented by the S&P 500 Index, managed to break out above their 200-day moving average last week. This is a significant event and has led to higher returns over all time periods from one week to 52 weeks 65% to 85% of the time.

Similarly, the level of breadth has been very encouraging. Most stocks are participating in the move higher. When we have the kind of bullish thrust in breadth (stocks advancing versus those declining) that we have had in the last week (including yesterday), it has led to further advances over all future time periods up to one year in advance a very high percentage of the time.

As a result, I’m confident that we will see new index record highs this month barring negative developments on the COVID front or continued domestic turmoil. The peaceful, lawful protests are heartfelt and continue to be a testament to America’s long respect for freedom of expression, but the late-night loss of life and looting by others obviously has distressed many. Yet stocks continue to prosper.

Over the last 100 years, seasonality has been favorable for stocks in June, although not so much in the last 20 years. Our Political Seasonality Index is positive through June 12, so those new highs seem more likely to occur in the first half of the month. (Our Political Seasonality Index is available post-login in our Solution Selector under the Domestic Tactical Equity category.)

Bonds

As the economy shows signs of reopening, and as the Federal Reserve Balance Sheet continues to grow with Fed purchases of bonds and ETFs, interest rates have stopped falling and are actually moving higher once more. Of course, that means that the price rise in bonds seems to have topped out.

The price action of the popular 7-10 year Treasury bond ETF (IEF) is evidence of this. It seems entirely possible that its price will drop below its 50-day moving average in the near future. This has not happened in 2020. Our popular Government Income Tactical (GIT) and QFC Fixed Income Tactical (QFIT) strategies had very little exposure to government bonds the last few weeks.

Gold

Gold, too, has seemingly run into a ceiling of late. Despite tensions between China and the U.S., and the curfews and National Guard in the streets of hundreds of U.S. cities, as long as the outlook for the economy continues to improve, it seems that gold’s march to new highs may be delayed. A breach of its 50-day moving average this week also seems likely. Like with bonds, however, the 50-day moving average may prove to be resistance against further price erosion.

With the near-term outlook for flight-to-safety investments such as bonds and gold looking weak, the short-term trend indicators we monitor for stocks remain positive. Although the very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure remains at 0%, perhaps cautious in the face of overbought and very optimistic market sentiments by many.

Similarly, our intermediate-term tactical strategies remain mixed: The Volatility Adjusted NASDAQ (VAN) strategy has moved back into the market with a 40% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 105.4% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our Self-adjusting Trend Following (STF) strategy has increased to 200% invested. VAN, SA, and STF 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 now in a Deflation economic environment stage (meaning a negative monthly change in the inflation rate and negative monthly GDP reading). Last week, the Commerce Department reported that the GDP fell at a 5% annual rate in the first quarter. One month ago, the first estimate reported was -4.8%.

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.

All of us here at FPI wish you health and safety in these trying times,

Jerry



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