Market insights and analysis

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

3rd Quarter | 2021

Market insights and analysis


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

The major stock market indexes finished up last week. The Dow Jones Industrial Average gained 2%, the S&P 500 Index rose 0.7%, the NASDAQ Composite gained 0.08%, and the Russell 2000 small-capitalization index gained 0.55 %. The 10-year Treasury bond yield rose 17 basis points, as Treasury bonds lost nearly 0.9% for the week. Last week, spot gold closed at $1,945.12, down $90.43 per ounce, or 4.4%.

While there seems to be some new jockeying for leadership among the various stock market indexes, with small caps and value stocks actually outshining the tech and growth stock leaders of the NASDAQ, the strong trend upward in stock market prices continues. Last Thursday (August 13) marked the 100th trading day since the March 23 market low that followed the February pandemic plunge. Since that time, the S&P 500 has soared over 50%, the first time this has happened in a 100-day trading period since 1933.

As stock prices best track earnings trends, it is probably not surprising to see this rally, given the success of the second-quarter earnings reporting season. The season concludes this week with what appears to be the highest-ever percentage of reporting companies beating their analysts’ forecasts. Over 70% of reports so far have beat estimates, and that is the best “beat rate” since at least the mid-2000s. And sales “beats” are currently about 65%, which is the best level in over five years. Tech led the “beat” parade with over 87% of its members topping analyst estimates for the quarter!

The July retail sales report released on Friday (August 14) confirmed the company reports, as it showed a return to new highs. While the report did not beat the estimates, it did conclude a five-month snapback from the pandemic declines initiated this spring. In contrast, it took 40 months for sales to come back after the 2007 financial crisis.

Stocks were also helped by the continued improvement in COVID numbers. According to Bespoke Investment Group, positive test rates are trending down nationally. Not only is the national trend in hospitalizations now falling, but all of the “hot spot” states (those within 10% of their peak seven-day average per capita cases) have falling hospitalization rates. In fact, every state with a per capita hospitalization rate over 150 per million now sports a declining hospitalization rate.

Sentiment numbers are mixed. The American Association of Individual Investors (AAII) sentiment numbers stubbornly refuse to budge, with bullish sentiment a good 10 percentage points below the level they would normally be at in the midst of such a strong rally. Still, small investor option traders are more than making up the difference, as extreme levels of call option buying is evidenced by this group.

Our Political Seasonality Index points to an on-again, off-again choppy move higher that tops out on September 4. (Our Political Seasonality Index is available post-login in our Solution Selector under the Domestic Tactical Equity category.)

The Federal Reserve has continued its largest purchase of bonds and ETFs in history, causing its balance sheet to grow $14 billion last week alone. As a result, interest rates have been rising and bond prices have tumbled since the beginning of August.

There seem to be two main causes of the interest rate increase. First, the Federal Reserve pandemic response has caused a record supply of government debt. Secondly, the economy continues to surprise to the upside.

One look at the Citi Economic Surprise Index below demonstrates that economic indicators around the world have shaken off dire warnings from economists and surprised to the upside. In fact, the global version of the index, like the U.S. version, just surged to its highest reading on record!

Our popular Government Income Tactical (GIT) and QFC Fixed Income Tactical (QFIT) strategies have had little or no exposure to government bonds the last few weeks.

Gold took quite a tumble in the middle of last week. This reflected the similarly timed surge in interest rates that I spoke of earlier (higher interest rates increase the cost of gold ownership). It also reflects the fact that gold had become quite overbought.

The decline was the first experienced by the yellow metal after nine straight advancing weeks. Still, over the weekend it was reported that Warren Buffet sold many of his stocks to make room for a major gold stock purchase. In addition, inflation rates, which often support gold prices, were reported to be higher once again last week.

The indicators

The short-term trend indicators we monitor for stocks remain mixed. The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure remains at zero, while many other short-term patterns that I watch are now rated bullish.

Our intermediate-term tactical strategies remain uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy has a 120% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 129.17% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our Self-adjusting Trend Following (STF) strategy remains 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 Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative monthly GDP reading).

Stagflation is the next-to-the-worst regime stage for stocks, both in terms of return and drawdown. It is the best regime stage for gold on both measures. It is normally a period of middle-of-the-road returns for bonds with low volatility. Since 1972, the economy has been in a Stagflation stage only 9% of the time. Therefore, we have limited history upon which to base a forecast.

Our Volatility composite (gold, bond, and stock market) is now showing a Low and Falling reading, which favors stocks over gold and then bonds. This stage occurs about 37% of the time and is the strongest time for stocks.

All of us here at Flexible Plan wish you and your family health and safety in these trying times,


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