Market insights and analysis

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

3rd Quarter | 2023

Quarterly recap



Current market environment performance of dynamic, risk-managed investment solutions.

By Tim Hanna

The major U.S. stock market indexes were up last week. The S&P 500 increased by 2.10%, the Dow Jones Industrial Average gained 1.75%, the NASDAQ Composite was up 2.58%, and the Russell 2000 small-capitalization index rose 2.00%. The 10-year Treasury bond yield rose 1 basis point to 3.95%, taking Treasury bonds lower for the week. Spot gold closed the week at $1,856.48, up 2.51%.


Equity markets broke their losing streak and finished last week higher thanks to positive technicals, primarily very short-term oversold conditions, rather than fundamental optimism. Investors continue to be concerned about sticky inflation and the Federal Reserve raising rates higher and for longer than previously expected.

On the economic data front, ISM Manufacturing PMI came in at 47.7, slightly less than the 47.9 forecast. Values below 50.0 indicate industry contraction, while values above 50.0 indicate industry expansion. ISM Services PMI was 55.1, above expectations of 54.5. Unemployment claims were 190,000, while consensus expectations were 196,000. The Conference Board Consumer Confidence Index came in at 102.9, lower than the 108.5 expected.

The S&P 500 Index has maintained price action above the upper trend line of its yearlong bear channel for over a month now. Last week, the S&P 500 retested the upper trend line, which also coincided with its 200-day moving average. With prices currently experiencing support above the 200-day moving average, the golden cross (when the 50-day moving average crosses above the 200-day moving average) from late January remains in play. Market technicians consider the retest of the breakout point and support at the 200-day moving average bullish confirmation signals. These signals could indicate a continuation of the trend over the intermediate term.

From a technical perspective, the S&P 500 looks as good as it gets for the bulls. However, the uncertainties surrounding fundamentals and the economic implications of inflation and the Federal Reserve’s rate-hike cycle have many investors scratching their heads. We have a golden cross with a confirmed retest, higher lows since October of last year, and market breadth on the bullish side. Yet, there seems to be a major disconnect between technicals and investor expectations. Most headlines this year have been focused on recession and growth concerns, future earnings degradation, and a potential “hard-landing” scenario (where rising rates spark a recession) from the Federal Reserve’s rate-hike cycle.

Bespoke Investment Group looked at historical performance data to determine the significance of the S&P 500’s current streak of closes above the 200-day moving average after falling more than 20%. The study includes the post-WWII period and considers instances where the Index traded above its 200-day moving average for 20 or more trading days after experiencing a decline of over 20% from a 52-week high in the prior year.

Bespoke found that in the 12 periods shown in the following chart, the S&P 500 was up over the following three and six months 11 times for a median gain of 5.5% and 11.2%, respectively. One year later, gains were experienced over all of the study periods, with a median gain of 18.2%. Including the maximum and minimum gains over the next year, the Index was up at least 20% at some point in the next year nine out of 12 times. On the downside, there were two instances when the S&P 500’s maximum decline at any point in the next year was more than 5%.

This year’s high was set on February 2 (black arrow on the following chart), and equity markets have been pulling back all of February. When markets sell off, the question on investors’ minds is whether to hold or sell—is it just a pullback in a greater uptrend or a trend reversal to the downside?

One case for the bulls (that this is a pullback rather than a reversal) is that credit markets remain healthy. The following charts show spreads on high-yield and corporate bonds relative to Treasurys (as tracked by BofA indexes on an inverted basis) compared to the S&P 500. Credit markets have been improving at a steadier rate than stocks since last year’s lows in October. As stocks have declined, high-yield spreads have moved in the opposite direction (first chart). Corporate spreads have tracked the S&P 500 more closely during the recent leg down, but this comes after much larger outperformance since December.

Credit spread information is used as an input signal inside certain strategies. As spreads widen and narrow, our automated strategies are able to use this quantitative information in their systematic decision-making process.

Whether the present up move is sustainable and how far it will run are unknown. Current technicals could be overly optimistic, and investor sentiment can quickly turn negative if prices move down, resembling the price action experienced last year. Also, unforeseen events could sharply turn prices and break technical patterns, similar to what investors experienced during the COVID-19 crash.

Dynamically risk-managed strategies are able to respond to changing market conditions as the changes are reflected in asset prices. As markets have moved higher off lows set in the fourth quarter of 2022 and experienced less downside volatility recently, a number of our momentum-based strategies have moved into and are still in more risk-on positioning. Also, strategies that were inverse a few months ago have reduced, eliminated, or even flipped their short exposure.

If prices continue higher with low volatility, systematic trend-following algorithms are designed to recognize the price momentum and participate in a risk-on fashion. If volatility resurfaces and prices turn south, systematic momentum strategies are designed to identify the change and move to more defensive positioning.

The following chart shows the one-year performance of the Quantified Managed Income Fund (QBDSX, -4.7%) compared to the iShares Core US Aggregate Bond ETF (AGG, -12.7%). The Quantified Managed Income Fund is an actively managed income fund that can seek various income classes as well as the safety of cash when market exposure is undesirable. The Fund is a key defensive component in several actively managed strategies at Flexible Plan Investments.


The yield on the 10-year Treasury rose 1 basis point, ending last week at 3.95%.

Following a three-month pullback, the 10-year broke out of its downtrending resistance (black downward-sloping line on the following chart) in early February, potentially signaling a longer-term continuation of a rise in interest rates. The 10-year Treasury experienced minimal resistance at its 50-day moving average (green line on the following chart) and upper trend line (black line on the following chart).

The 50-day moving average was seen as a level of support for most of last year. With the recent price action in the 10-year Treasury, technicians will be watching trading activity during the next test of the 50-day moving average. Traders continue to speculate when rate hikes may pause, with some believing a pause could occur as early as midsummer.

T. Rowe Price traders reported, “Investment-grade corporate bonds declined for the week as rising Treasury yields and heavy new issuance weighed on the asset class. … More manageable expectations for new issuance in March were constructive for risk sentiment, and corporate credit spreads tightened on Thursday. In the primary market, most deals were well oversubscribed, but the influx of supply was a drag on bonds trading in the secondary market.

“High yield bonds were mostly well bid, and credit spreads continued to compress despite higher Treasury yields. … Improved equity performance seemed to bolster below investment-grade market sentiment, and the few new deals announced during the week were generally well received.”


Gold locked in a gain of 2.51% last week. The metal has been attempting to find support for the pullback it started in early February—this following a substantial upward move that started from its breakout in mid-November.

Gold is now trading in between its 50-day and 200-day moving averages. Very little buying support came in at the 50-day test. Investors are now eyeing resistance strength at a 50-day test and support strength if the 200-day is tested.

Until November, the U.S. dollar’s strength (the purple line in the following chart) had made it difficult for gold to rally. A strong dollar is a restraint on global liquidity and a headwind for inflation in the U.S. In general, a stronger dollar lowers the price of imports. During gold’s gain last week, investors saw the U.S. dollar pull back. The U.S. dollar and other non-equity or bond exposures are available asset classes for consideration within certain strategies at Flexible Plan Investments.

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

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week with 30% long exposure. Exposure changed to 80% long at Wednesday’s close, 90% long at Thursday’s close, and 50% short at Friday’s close. Our QFC Political Seasonality Index favored stocks from Tuesday’s (February 28) close 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 the week with 0% exposure to the NASDAQ, changed to 20% long at Wednesday’s close, and changed back to 0% exposure at Friday’s close. The Systematic Advantage (SA) strategy is 90% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy was 100% long throughout last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model was invested 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 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 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.

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