Market insights and analysis

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

2nd Quarter | 2021

Market insights and analysis

rss

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 mostly up last week. The S&P 500 increased by 1.67%, the Dow Jones Industrial Average was up 1.02%, the NASDAQ Composite rose by 1.94%, and the Russell 2000 small-capitalization index lost 1.23%. The 10-year Treasury bond yield fell 10 basis points to 1.42%, taking Treasury bonds higher for the week. Spot gold closed at $1,787.30, up 0.33%.

Stocks

Stocks pushed to new highs last week on better-than-expected economic data. Nonfarm employment change came in at 850,000, more than the 725,000 that was forecast. Unemployment claims were 364,000, slightly less than the 388,000 that was forecast. The unemployment rate registered at 5.9% on Friday, above the 5.6% that was forecast. ISM Manufacturing PMI was 60.6, compared to the 61.0 that was forecast. This marks 13 months in a row above 50.0%, characteristic of expansionary activity. The Conference Board’s Consumer Confidence Index for June was 127.3, better than the 118.9 that was expected.

As economic and fundamental data continues to deliver limited downside surprises halfway into 2021, the technical landscape also paints a bullish picture. The S&P 500 recently broke out to new highs and remains in a textbook uptrend channel.

Confirming the breakout and supporting the bullish trend is the Index’s cumulative advance-decline (A/D) line, which is also at new highs.

Historically, new highs on low volatility carry the risk of sharp increases in volatility, which are sometimes fundamentally unexpected. Employing dynamic risk management helps protect upside gains and limit downside losses when prolonged down periods are experienced by investors.

Our major trend-following strategies are all long at the moment, some in maximum long positioning of 200%. This makes sense considering the trend and volatility. 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.

Bonds

Treasury yields decreased last week, sending bond prices higher. The 10-year Treasury continued to hold well below the value zone turned resistance level set between March and May.

Over the past month, increases in short-term rates (1-year Treasury, the orange line in the following chart) and the decline in long-term rates (10-year, the blue line) have resulted in a flattening of the yield curve. As a reminder, this is the opposite of the risk that investors were concerned about over the past year. The yield curve movement shows a shift in risk to the bond market from accelerating inflation to “policy error” pricing, meaning tightening sooner than the market expected.

T. Rowe Price traders reported, “Investment-grade corporate bond spreads … moved tighter on Monday despite a mixed session in equities and a move lower in rates. … In the latter half of the week, spread movements were limited as secondary flows and overnight activity were relatively light in the leadup to the holiday weekend. … High yield market sentiment was generally positive as broader risk markets continued to weigh the impact of COVID variants, the status of fiscal policy negotiations, and inflation expectations.”

Gold

Gold was fairly quiet last week following its sharp sell-off that started in early June. The metal is now trading below its 50-day and 200-day moving averages, considered an initial line of resistance at current levels.

Price pulled back to the origination point of the upward breakout that started in May. If support holds at the origination point, a retest of May highs could signal a longer-term upward continuation. However, a break below late June lows would technically form a downward bear channel with the next line of support around $1,683 for the yellow metal.

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 started the week 10% long. It changed to 50% short at Thursday’s close and then to 60% long at Friday’s close.

Our intermediate-term tactical strategies are positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy started last week 160% long to the NASDAQ, changed to 140% long at Monday’s close, switched to 160% long at Tuesday’s close, changed to 180% long at Thursday’s close, and changed to 200% long at Friday’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 Falling reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003. It is a stage of above-average returns for equities, but average returns for bonds and gold.



Comments are closed.