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.

Market Update 9/27/21

By Tim Hanna

Major U.S. stock market indexes were up last week. The S&P 500 increased by 0.51%, the Dow Jones Industrial Average was up 0.62%, the NASDAQ Composite gained 0.02%, and the Russell 2000 small-capitalization index was up 0.50%. The 10-year Treasury bond yield rose 9 basis points to 1.45%, taking Treasury bonds lower for the week. Spot gold closed at $1,750.42, down 0.22%.

Stocks

Following an early-week sell-off, stocks managed to end the week in the green. Investors feared that a possible default by Evergrande, China’s second-largest property developer (and the world’s most heavily indebted), could spark a global financial contagion similar to when Lehman Brothers collapsed during the 2008 financial crisis. News of a restructuring plan for Evergrande and capital injection into the Chinese banking system helped stocks regain a good portion of their early-week losses.

On the economic data front, housing numbers were encouraging. Building permits were at 1.73 million, compared to the 1.60 million forecast. Housing starts were better than expected, coming in at 1.62 million versus the 1.55 million forecast. Existing home sales were within expectations, registering at 5.88 million. New home sales in August were at 740,000, their highest level in four months. In the labor market, unemployment claims came in at 351,000, higher than the 322,000 forecast.

The Federal Reserve’s policy meeting concluded on Wednesday (September 22). As expected, policymakers announced that they would soon consider tapering. During the post-meeting conference, Federal Reserve Chairman Powell reiterated that they would like continued improvement in the labor market before tapering. From the Federal Open Market Committee’s updated Summary of Economic Projections, officials are evenly split on the start date for raising interest rates. Some are in favor of 2022, and others prefer 2023. The majority of officials anticipate at least three quarter-point rate hikes by year-end 2023.

Following the initial sell-off last week, the S&P 500 dipped into oversold territory, according to the spread of its 50-day moving average. The following chart shows the spread of the S&P 500’s 50-day moving average over the last year.

The next chart shows the number of stocks in the S&P 500 that are overbought and oversold daily. Oversold stocks are trading at least one standard deviation below their 50-day moving average. Overbought stocks are trading at least one standard deviation above their 50-day moving average. When the red line is extremely high and the green line is extremely low, it is an indication the market is oversold.

September’s equity weakness has come with weak breadth. On Monday, the S&P 500’s 10-day advance-decline line registered its weakest reading since March 2020. Following the rebound in the second half of last week, breadth has improved, but the 10-day advance-decline line remains negative.

Last week, there was a shift in sentiment with a massive decline in optimism. According to the American Association of Individual Investors’ (AAII’s) weekly investor sentiment survey, bullish sentiment saw its largest one-week decline in over two years.

September’s sharp increase in volatility and flip in sentiment is a reminder to investors that active risk management can be a key to a portfolio’s long-term success. Actively risk-managed strategies attempt to capture the upside while managing the losses on the downside. If the market conditions of September continue into the fourth quarter, being able to adapt to market changes will be of the utmost importance.

Bonds

The approach of tapering and expectations around future interest rate increases helped push the yield on the 10-year Treasury up by 9 basis points to 1.45%. The 10-year Treasury continued its breakout from the bear price channel that started forming in May 2021, now above all short-term peaks set since early August. As we have pointed out before, trading action above 1.37% could signal a move higher from a technician’s perspective. The next line of resistance to watch is 1.55%, the origination of the down move in rates that started in May.

T. Rowe Price traders reported, “Investment-grade corporates experienced strong demand as the Treasury sell-off intensified, and spreads tightened on above-average trading volumes. Meanwhile, high yield bonds traded lower as the week began amid concerns about China volatility, the possibility of Fed tapering, global growth expectations, and headwinds for President Joe Biden’s spending agenda.”

Gold

Last week, gold continued its move lower following recent resistance at the 50-day and 200-day moving averages. The yellow metal has struggled to break out of the high-to-low range set in the first quarter of 2021. Currently, the metal is trading in the lower half of its 2021 price range, below both its 50- and 200-day moving averages, and approaching swing lows, which are the next areas of potential support. With the sideways nature of the metal this year, and especially since late June, a retracement to the upper channel and/or moving averages would not be unexpected.

Flexible Plan Investments 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 was 200% long to start last week. It went flat on Monday’s close and changed to 50% long on Tuesday’s close to begin this week. Our QFC Political Seasonality Index was in a defensive position throughout last week. The strategy moved to long equities on Friday’s close. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

Our intermediate-term tactical strategies are positive, although to varying degrees. The key advantages these strategies offer to investors is their ability to adapt to changing market environments, participate during uptrends, and adjust exposure to more defensive posturing during downtrends.

The Volatility Adjusted NASDAQ (VAN) strategy started last week 200% long to the NASDAQ, changed to 160% on Monday’s close, and changed to 140% long on Wednesday’s close to begin this week. 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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