Market insights and analysis

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

2nd Quarter | 2022

Market insights and analysis


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

By Jerry Wagner

Last week, the Dow Jones Industrial Average lost 1.3%, the S&P 500 Index fell 2.2%, the NASDAQ Composite dropped 4.1%, and the Russell 2000 small-capitalization index gave back 2.2%. The 10-year Treasury bond yield fell 25 basis points to 2.88%, sending bond prices higher for the week. The U.S. Aggregate Bond ETF (AGG) gained 1.5%, while the 20-year Treasury Bond ETF (TLT) rose 3.1%. This week, gold futures closed at $1,807.00, down $23.30 per ounce, or 1.27%.


Stocks continued within a well-defined downtrend last week. The downturn began at the first of the year, experienced a bear market rally in March, but then resumed with even more fury at the end of the first quarter.

Many market watchers are hoping that the June 17 low point marked the bottom of the bear market cycle. Unfortunately, the chart does not as yet confirm that hypothesis. We have barely risen from that low, and as the returns last week demonstrate, we are still experiencing weekly losses with but one week of respite.

In addition, we continue to see large one-day declines. It has become almost commonplace to see 2% down moves. Consider this fact from Bespoke Investment Group: “While there are still another six months left in the year, only ten other years have seen as many or more 2% daily declines in their entirety!”

Overall, the S&P 500 representation of the “stock market” has fallen about 20% for the year and has exceeded the 20% level at its maximum drawdown. That has not happened in the first six months of many years in stock market history (back to 1928).

It sounds bad, but perhaps there is a light at the end of the tunnel. While there are too few cases to be statistically significant, results in those few cases suggest gains for the next quarter and the rest of the year. Although, it may also be noteworthy that only the 1970 case finished the year in the black.

With the second quarter in the books, it is interesting to see how closely the second quarter matches up with the first quarter of 2022. The only difference is that the first-quarter bear market had a larger rally that allowed the index to finish the first quarter down just 5%, while the second quarter ended with a decline of 16%. Drawdown was in double digits in both quarters, with the first quarter seeing a 13% drop and the second quarter 20%. Meanwhile, the NASDAQ 100’s drawdown was 21% in the first and 27% in the second quarter.

While these quarters were very similar in terms of the negative performance of the indexes, our strategy performance was very different.

Flexible Plan Investments offers 19 different turnkey multi-strategy portfolios: five QFC Fusion 2.0, five Multi-Strategy Core, four Multi-Strategy Explore, and five Multi-Strategy Portfolios. And, there are 167 strategies tracked on our Strategic Solutions TAMP platform. In the table above, I’ve set forth the percentage of each of those two categories that outperformed the S&P 500 (on the left) and the NASDAQ 100 (on the right).

Notice that while most of the strategies outperformed the indexes in the first quarter, the strategies fared even better in the second quarter, which was the worst of the two. As a result, the year-to-date (YTD) percentages that encompassed both quarters were also much better than the first-quarter results.

The reason for the big improvement is, as I have pointed out many times (here and here, for example), most investment strategies are by nature reactive. The market fundamentals, technical indicators, economic measures, and trends take time to change. Real change rarely occurs overnight.

It does not appear that economic news is likely to improve investors’ appetites for stocks. Economic reports continue to disappoint. The number of underachievers versus economist expectations continues to grow, matching numbers last seen in the final quarter of 2008 and the first quarter of 2015.

As a result, America’s Economic Confidence Index has fallen to its lowest level since the depths of the 2007–2008 bear market.

To add insult to injury, the final revision of the first-quarter GDP showed a worsening economic picture, moving to -1.6% from -1.5%. On top of that, the Atlanta Fed’s economic model is now forecasting a 2.1% decline in second-quarter GDP. That would mean back-to-back negative quarters for the U.S. economy, the very definition of a recession.

Despite the Atlanta Fed’s position, inversions to the yield curve that usually forecast a recession have been few and far between. While the yield curve continues to flatten, only 3.6% of the 29 followed curves have in fact inverted. Normally, 50% or more are required before a recession call is likely.

Finally, earnings season will commence soon. This can be a positive event for stock market investors. This is especially so when analysts are potentially overreacting to economic distress, and they lower expectations to the point where beating their estimates becomes more likely.

When stocks beat their estimated earnings and revenue targets, positive price reactions are often in the cards, pushing the stock indexes higher. We enter the third quarter in just such a condition, and that may give a boost to stock prices.

Bottom line: I believe that positive seasonality (see the final section of this update), the very negative sentiment that often acts as a contrarian indicator, and the boost we may get from earnings will result in an uptrend in stock prices over the next few weeks or so. Still, I’m not convinced that the June 17 low is going to be the rock bottom of the current bear cycle lower. That may come in August–October of this year.


Last week bond yields continued lower, providing a welcome relief rally for bondholders who have generally been pummeled this year.

I believe this is the result of two factors: First, we’ve entered a “bad news is good news” environment. By that I mean that economic news has been so bad that many investors believe that the Federal Reserve may alter its plan for future rate hikes. Second, and in the same vein, there are some signs that the worst of inflation may be behind us. Copper prices have fallen 22%, and lumber has tumbled more than 60%. Even gasoline, which had been soaring since 2020, has edged lower.

As a result, the long-term Treasury bond has moved away from its lows, having fallen more than 35% since its high in 2020.

Still, in the scheme of things, the move in yields and bond prices remains just a blip on a well-established downward trend line. And it’s a trend line that has consistently moved yields higher whenever they neared or even slightly eclipsed their 50-day moving average. Friday, we fell to that level, and if recent history repeats, we could see a rebound in yields and a quashing of the nascent rally in bond prices.

Another indicator that the bond rally may not continue can be found in the price action of the high-yield bond sector. These bonds have characteristics of government bonds in that they respond to trends in rates, but at the same time, they are also responsive to trends in the stock market. As is evident in the chart above, the weakness in stocks has won out, sending these bonds lower, and there has been no rally in them as yields have declined.


Gold, like other commodities, continued to drop in value last week. The decline actually seemed to accelerate. After three straight months of decline, we are now back to support levels last seen in December. It may be that prices will need to fall to levels reached in both August and October 2021 before reversing course.

As interest rates move higher, they undercut gold by increasing both the opportunity cost of holding gold and the attractiveness of the U.S. dollar. In yet another indication that the current move lower in yields is not sustainable, the price action of the dollar has not confirmed it. The dollar had been rallying based on the Fed's fight against inflation. Last week, instead of reversing lower on investor beliefs that the Fed may pause, currency traders continued to bid up the price of the dollar. Gold suffered as a result.

Flexible Plan Investments (FPI) is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 9 years ago to track the daily price changes in the precious metal.

The indicators

The short-term-trend indicators for stocks that we watch are mixed. Our very short-term-oriented QFC S&P Pattern Recognition strategy, however, has been long since June 28, 2022.

Our Political Seasonality Index has been in the market since the close on June 27 and will stay there until the close on July 20, when it will briefly exit. (Our QFC Political Seasonality Index—with all of the 2022 daily signals—is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

Historically, July has been the most consistently positive month of the year. This may be a surprise to those that practice a “sell in May and go away” strategy.

The QFC Political Seasonality Index strategy is included in our QFC Multi-Strategy Explore portfolio within Special Equities.

FPI’s intermediate-term tactical strategies are defensively positioned. The Volatility Adjusted NASDAQ (VAN) strategy is 40% inverse to the NASDAQ, the Systematic Advantage (SA) strategy is 30% exposed to equities, and our QFC Self-Adjusting Trend Following (QSTF) strategy moved into a neutral position on Tuesday’s (7/5) close, having spent last week inverse to the NASDAQ. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

On June 21, 2022, Classic generated a sell signal and moved into 100% defensive positions. Since that signal, the number of underlying negative Classic indicators has actually gotten worse.

At the beginning of May, our All-Terrain indicator, one of Flexible Plan’s Market Regime Indicators, registered a major change. Our Growth and Inflation measure began signaling that we were in a Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative monthly GDP reading).

This occurs only about 9% of the time and favors gold and then bonds over stocks. It is a time of moderate risk for gold, but stocks have their second-worst drawdown of all the regimes. Only the Deflation economic environment has seen larger drawdowns for stocks. The last time we saw this condition was in the late 1970s and early 1980s, when substantial shrinkage of the Case/Shiller P/E occurred, driving stocks and the ratio down to as low as 7 times earnings

Our S&P 500 volatility regime is registering a High and Falling reading, which favors gold over bonds and then equity from an annualized return standpoint. The combination has occurred 13% of the time since 2003. It is a stage of lower returns for equities and higher volatility for both gold and stocks. The S&P 500 registered a maximum drawdown of over 29% during one of these regimes, while gold’s maximum price loss was over 21%.

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