Market insights and analysis

By Tim Hanna

Market snapshot

•  Stocks: Equity indexes experienced mixed performance last week due to DeepSeek AI news, earnings, the FOMC decision, and tariff impacts. The Dow Jones Industrial Average was the only major index to gain for the week.

•  Bonds: The yield on the 10-year Treasury fell by 8 basis points to 4.54%. Rates continued to pull back last week, with the Federal Reserve leaving rates unchanged during Wednesday’s FOMC meeting.

•  Gold: Gold rose 1.00% last week, reaching a new 52-week high. The golden cross remains in play, with both the 50-day and 200-day moving averages trending upward and price holding well above both.

•  Market indicators and outlook: Market regime indicators show the market is in a Normal economic environment stage, which is historically positive for stocks, bonds, and gold but with a substantial risk of a downturn for gold. Normal is one of the best stages for stocks, with limited downside. Volatility is High and Falling, which favors gold over bonds and then stocks from an annualized return standpoint.

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The major U.S. stock market indexes were mixed last week. The S&P 500 decreased by 0.99%, the NASDAQ Composite was down 1.63%, the Dow Jones Industrial Average gained 0.27%, and the Russell 2000 small-capitalization index fell 0.86%. The 10-year Treasury bond yield fell 8 basis points to 4.54%, taking Treasury bonds higher for the week. Spot gold closed the week at $2,798.41, up 1.00%.

For the latest information on our Quantified Funds, check out our weekly fund updates. You can also see the daily holdings of the funds here.

Stocks

Last week, equity markets opened sharply lower following news about DeepSeek, a Chinese artificial intelligence (AI) platform that is reported to be less resource-intensive than U.S.-based ChatGPT. The announcement raised concerns about the competitiveness of companies driving the AI rally in the U.S., potentially prompting shifts in capital spending if DeepSeek proves to be as good as industry professionals speculate. The news hit Nvidia (NVDA) the hardest, and its stock dropped 17% on Monday—its largest single-day market-cap loss ever. For context, Nvidia shares lost 15.8% for the week once the week finished up. Other major market drivers included corporate earnings, the Federal Open Market Committee (FOMC) decision, economic data, and tariff impacts.

Sector performance varied: Communication Services, Consumer Staples, and Health Care each gained over 1.50%. Information Technology struggled the most, losing more than 4.50%. Energy and Utilities followed with losses of over 2.00%.

On Wednesday, the FOMC left the target range for the fed funds rate unchanged at 4.25%–4.50%, as expected. Stocks sold off late Friday after the White House announced new tariffs set to take effect on February 1: 25% on Canadian and Mexican imports and 10% on Chinese goods. These tariffs were tied to concerns over immigration, the trade deficit, and fentanyl issues.

The prior week’s market record highs were followed by a gap down and day’s close over 1% down on Monday. Bespoke Investment Group analyzed historical instances of such declines following record highs, finding that these occurrences rarely signaled long-term downtrends.

The following table lists each time the SPY ETF (since inception) fell more than 1% after hitting a record high in the prior session. One week and month forward, average and median returns were in line with historical averages for all periods since 1993. Longer-term forward performance was better than average. Six months forward, the median gain was over 8%, with positive returns in 15 out of 16 instances. One year forward, the median gain was slightly over 15%, with gains in 14 out of 16 cases. The median maximum gain over the next year (19.9%) was significantly larger than the median maximum loss (-3.7%).

Market breadth showed unusual patterns last Monday and Tuesday. Despite the S&P 500 falling over 1% on Monday, two-thirds of the stocks in the Index traded higher on the day, marking the Index’s strongest daily net advance-decline reading on a 1% down day since the 1990s. Conversely, the market rebounded over 0.6% on Tuesday, yet breadth was negative—an uncommon occurrence.

From a technical perspective, it’s concerning that last Friday’s new high in the Index was not accompanied by a new high in the cumulative advance-decline (A/D) line. The following chart shows that cumulative breadth remains moderately below its fourth-quarter high. During the dot-com bubble, breadth lagged price for years before the peak back then. While this has been a short-term divergence, a continued gap would be more concerning.

One encouraging breadth signal is the reversal in the S&P 500’s 10-day A/D line. In December, a record streak of negative daily breadth pushed the indicator to a 52-week low of -1,646. Over the next five weeks, it rebounded to 1,722, just below a 52-week high. Such extreme shifts are rare.

Since 1990, there have been only 10 instances where the 10-day A/D line rallied above +1,500 after falling below -1,500 within the previous five weeks (see the following table). Before last week, the most recent occurrence was in October 2022, following the bear market low. While one- and three-month forward average and median returns have been inconsistent, six months forward, the Index’s median gain was 7.45%, with positive returns 80% of the time. One year forward, the median gain was nearly 20%, with positive returns 90% of the time.

Bespoke’s Matrix of Economic Indicators for December showed a slowdown in the pace of economic data, with more indicators showing negative momentum readings year over year. This is the first time since July that negative momentum outweighed positive momentum from an indicator standpoint. December’s data ended a four-month streak of net positive readings—the longest since October 2020.

Here are some key takeaways from Bespoke’s monthly update:

•  Manufacturing: The Institute for Supply Management (ISM) Manufacturing Index has remained below 50 for over two years, signaling ongoing contraction.  

•  Employment: December saw the first negative breadth reading since July.

•  Housing: Higher interest rates weighed on the sector, with Housing Starts and Existing Home Sales as the only indicators showing positive momentum in their year-over-year readings.

•  Inflation: While overall inflation remains lower, its pace of improvement has stalled. Six of the eight inflation indicators that Bespoke tracks showed an acceleration in their year-over-year readings with only core consumer price index (CPI) and core personal consumption expenditures (PCE) slowing.

•  Consumer data: After strong momentum in previous months, December saw a sharp reversal, with all seven tracked indicators turning negative for the first time since April 2023. Despite this, personal income and personal spending are still growing at over 5% year over year.

When market momentum is positive, many of our momentum-based strategies adjust to a more risk-on positioning. If prices continue to rise, systematic trend-following algorithms are designed to identify and participate in the upward price momentum. Conversely, if volatility arises and prices decline, systematic momentum strategies are designed to identify the change and move to more defensive positioning. Mean-reversion strategies attempt to recognize and navigate sideways market conditions, offering an uncorrelated complement to momentum-based programs, which face challenges during trend-reversal inflection points.

One such systematic momentum methodology is the Quantified STF Fund, which was recently recognized as the top performer in the Morningstar Tactical Allocation category (246 funds) in 2024. The Fund dynamically trades the NASDAQ 100, identifying long-term trends within the market to determine its signal, ranging from 1X inverse to 2X long, with the flexibility to adjust its position daily. The Fund is used within some of our QFC strategies, including our QFC Self-adjusting Trend Following strategy, and can be used in our turnkey solutions. The following chart shows the one-year performance of the Quantified STF Fund (QSTFX, 24.64%) compared to the Invesco QQQ Trust (QQQ, 26.00%).

Bonds

Last week, the 10-year Treasury yield fell 8 basis points, closing at 4.54%.

On Wednesday, the Federal Reserve held its first meeting of the year and kept rates unchanged in a range of 4.25%-4.50%, in line with market expectations. In its post-meeting statement, the Fed noted that “economic activity has continued to expand at a solid pace,” while “labor market conditions remain solid” and inflation “remains somewhat elevated.”

Federal Reserve Chairman Jerome Powell stated that the Fed does “not need to be in a hurry to adjust” its policy stance, stating that further cuts would require real progress on inflation or weakness in the labor market. Markets believe that this statement suggests that the Fed will likely keep rates unchanged again at its next meeting.

T. Rowe Price traders noted, “U.S. Treasuries generated positive returns, due in part to an ease in the initial angst surrounding the DeepSeek developments from Monday. … The investment-grade corporate bond market had a quiet week with only three issuers coming to market on Tuesday, and new issues were oversubscribed.”

Gold

Gold rose 1.00% last week, reaching a new 52-week high. The yellow metal broke out of its consolidation pattern in mid-January (black lines on the following chart) and continued pushing higher on Monday (2/3).

The “golden cross” (when the 50-day moving average crosses above the 200-day moving average) remains in play. This formation is typically seen by technicians as a bullish longer-term trend signal. With gold at new highs and above both moving averages, the 50-day moving average is no longer showing signs of rolling over.

Flexible Plan Investments is the subadviser to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 11 years ago to track the daily price changes in the precious metal in a more tax-efficient manner than its ETF counterpart, GLD. The Fund is used within some of our QFC strategies (such as our QFC TVA Gold) and can be used within our more customizable turnkey solutions, such as our QFC Multi-Strategy Core and Explore offerings.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week with 0% exposure. Exposure changed to 10% long at Monday’s close, 30% long at Tuesday’s close, and 20% long on Wednesday’s close, where it remained through the end of the week. Our QFC Political Seasonality Index favored stocks throughout last week. (Our QFC Political Seasonality Index is available—with all of the daily signals—post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)

Our intermediate-term tactical strategies have been varied in their degree of defensive positioning. The key advantages these strategies offer to investors are 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 with 100% long exposure to the NASDAQ. It changed exposure to 80% long at Monday’s close, 40% long at Tuesday’s close, and 60% long at Friday’s close. The Systematic Advantage (SA) strategy is 120% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy signal started last week with 200% exposure and changed to 160% long exposure at Monday’s close, where it remained through the end of the week. VAN, SA, and QSTF can use leverage, which can result in investment positions exceeding 100%.

Our Classic model remained in stocks throughout last week. Most of our Classic accounts follow a signal that will allow the strategy to change exposure in as little as a week. A few accounts are on platforms that are more restrictive and can take up to one month to generate a new signal.

Flexible Plan’s Growth and Inflation measure is one of our Market Regime Indicators. It shows that we are in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and a 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 but 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 High and Falling reading, which favors gold over bonds and then stocks from an annualized return standpoint. The combination has occurred 13% of the time since 2003. It is a stage of higher returns and lower volatility for bonds relative to the other volatility regimes.