Market insights and analysis

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

2nd 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 1.96%, the Dow Jones Industrial Average was up 1.08%, the NASDAQ Composite rose by 2.84%, and the Russell 2000 small-capitalization index gained 2.15%. The 10-year Treasury bond yield fell 1 basis point to 1.28%, taking Treasury bonds higher for the week. Spot gold closed at $1,802.15, down 0.55%.

Stocks

Following a sharp sell-off on Monday (July 19), stocks rebounded and ended the week at record highs.

Economic reports continued to disappoint last week. Building permits, historically a leading indicator, came in at 1.598 million, less than the 1.700 million that was forecast. Unemployment claims were at 419,000, more than the 350,000 that was forecast. The Conference Board’s Leading Economic Index for June increased at its slowest pace since February. It came in at 0.7% compared to the 0.9% that was expected.

In contrast, earnings and revenue reports have been terrific. So far, more than 80% of reports of both earnings and revenues have beat analysts’ estimates. With most of this quarter’s reports still to come, there is still a substantial opportunity both for positive surprises and also major disappointments that could disrupt markets this earnings season.

Last week marked the start of the Summer Olympics in Tokyo. With almost a century of historical data, Bespoke Investment Group researched what the market implications of the Olympics might be. The study includes the performance of the S&P 500 between the opening and closing ceremonies since 1928.

From the close on the day of the opening ceremonies through the close on the day of the closing ceremonies, stocks have averaged a return of 1.7%. The study found that the market only rises 57% of the time during the Summer Games; however, the maximum drawdown is just 2.9% over the period. Since 1994, home country equities follow a similar performance pattern as the S&P 500.

The stock market remains overbought, but the 50-day moving average has provided a floor to price drops for almost a year. Even when we have breakthroughs, the losses have been minimal.

Bonds

Treasury yields decreased last week, sending bond prices higher.

The 10-year Treasury continued to trade within its bear price channel that started forming in May. The 10-year started the week by falling sharply on increasing fears around the delta variant. As worries of potential lockdowns in the U.S. eased midweek, yields retraced earlier moves and ended relatively flat on the week.

Commodity prices continue to soar, but investors are still generally ignoring the trend this quarter. All eyes will be on the Federal Reserve this week to see if the monetary authority maintains its belief that the price increases are transient.

T. Rowe Price traders reported, “Investment-grade corporate bond spreads … moved wider early in the week on light flows, as concerns regarding the delta variant and inflation weakened sentiment. However, spreads retraced throughout the week, aided by the rebound in equities and a steepening Treasury yield curve. … The high yield market experienced some weakness due to delta variant concerns, but sentiment improved as the market’s focus shifted to corporate earnings reports later in the week.”

Gold

Gold continued to consolidate below its 50-day and 200-day moving averages, considered an initial line of resistance at current levels. If prices head lower, the golden cross that occurred earlier this month may be short-lived and quickly followed by a death cross (50-day crossing below the 200-day).

In terms of price action, a breakout from the triangular consolidation range is what technicians are looking to for intermediate direction. Typically a sign of early trend formation, a breakout in either direction is historically met with increasing volume.

Flexible Plan is the subadviser to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 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 started the week 160% long and changed to 200% long at Monday’s close. It remained fully leveraged long to begin this week. Our QFC Political Seasonality Index continues to favor stocks since our buy signal on June 23. A sell signal will occur on the close of August 3. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.) Finally, on the short-term front, with bullish sentiment falling and bear sentiment rising, sentiment seems to be giving a green light to further stock market gains.

Our intermediate-term tactical strategies are positive, although to varying degrees. This makes sense considering the trend and volatility as markets are making new highs. The key advantage they offer to investors is their ability to adapt to changing market environments, participate during uptrends (as they are currently), and adjust exposure to more defensive posturing during downtrends.

The Volatility Adjusted NASDAQ (VAN) strategy started last week 160% long to the NASDAQ, changed to 180% long at Monday’s close, switched to 160% long at Tuesday’s close, and changed to 140% long at Wednesday’s close. The Systematic Advantage (SA) strategy is 120% 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 Low and Rising reading, which favors gold over stocks and then bonds from an annualized return standpoint. The combination has occurred 27% of the time since 2003.



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