Market insights and analysis

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

4th Quarter | 2023

Quarterly recap



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

By Jerry Wagner

The major market indexes finished up last week. The Dow Jones Industrial Average gained 0.34%, the S&P 500 Stock Index rose 0.37%, the NASDAQ Composite climbed 0.14%, and the Russell 2000 small-capitalization index gained 1.83%. The 10-year Treasury bond yield rose 5 basis points to 3.74%, and bonds weakened in price. The U.S. Aggregate Bond ETF (AGG) dropped 0.12%, and the 20-year Treasury bond ETF (TLT) fell 0.07%. Gold futures closed at $1,961.19, up $13.22 per ounce, or 0.68%.


The S&P 500 closed more than 20% above its October 12, 2022, low on Friday (6/12). This ended the Index’s 248-day bear market, the longest since 1948. During that time, the Index fell as much as 25.4% and still lingers about 10% below the all-time high it set on January 3, 2022. Not only did the Index enter a new bull market, but it also broke above the bear-market-rally high set last August just before the Index plunged 17%.

Historically, the week after switching from a bear to a bull market is challenging for the S&P 500, although the Index has generally moved higher over the following three to 12 months. The week ahead could be volatile as well, but the intermediate- and long-term outlook for stocks remains optimistic.

This week, the stock market will face a triple threat: the consumer price index (CPI) monthly report on Tuesday, the producer price index (PPI) monthly report on Wednesday morning, and the Federal Reserve rate announcement following its meeting Wednesday afternoon. As the following chart shows, futures traders only see a 33.9% chance of a further increase in interest rates.

The market is betting on a pause in the Fed’s 10 straight rate increases. After all, that many consecutive increases is pretty rare. It’s the most since the Fed ended a 17-month streak in 2006 that sent the economy reeling into a recession.

The belief that the Fed should pause is well-founded. Fed officials have been hinting at it for weeks. As the following charts show, inflationary pressures have seemingly been tamed. The CPI and PPI (both measures of inflation) are in pronounced downturns. In fact, the rate of change to the downside has even topped the rapid rise in the measures before that.

Historically, when there is a pause, stocks generally rise in the intermediate to longer term. In the short term, though, a pause can be more problematic.

There are three possible scenarios:

  1. The reports are not as expected and stocks fall.
  2. The reports are as expected and stocks rally.
  3. The reports are as expected but already baked into stock returns, and the market tumbles.

Like with the forward pass in football, two out of three of the outcomes are negative. Yet we still throw the ball, because when it is successful the results are great.

Since many indicators point to some short-term weakness here, I think scenarios 1 or 3 are likely, but I hope for scenario 2. However, the S&P 500 is in overbought territory—the deepest it’s been since 7/21. Every time we’ve been near here in the last year, stocks have retreated.

Sentiment has become more bullish, and our Political Seasonality Index is selling on Tuesday’s (6/13) close. Even the bullish indicators for the long term mentioned below show weakness over the next week or so.

At any rate, I am extremely bullish on the longer term. Most of the indicators that have historically marked a risk-on period favoring stock investments have switched strongly to that position. This usually presages further market advances.

As the following chart indicates, the S&P/Treasury bond ratio has hit its highest level in history. When this measure rises, stocks usually do as well.

Similarly, volatility is historically low. Not only is it at the lowest level since January 2020, but it came in below 14. Historically, such low readings have led to higher prices most of the time over the next three-, six-, and 12-month periods. In addition, in these circumstances, the VIX itself usually increases in the short term (better than 80% of the time).

On the sentiment front, we are currently experiencing the second-longest stretch of negative sentiment, lasting 358 days. This is just 16 days shy of the record set in May 2009—which was a great time to buy stocks after the 2007–2008 correction.

Bottom line: We will likely see short-term weakness in stocks. However, the prospects for the intermediate and long term remain strong.


Most defensive asset classes declined in value in June. Bond yields resumed their upward climb, consistent with the May death cross (when the longer-term moving average crosses above the shorter-term moving average).

Still, as the previous chart illustrates, the 10-year Treasury yields have traced out a pattern of declining tops and bottoms that suggests that the worse may be over for bonds. Even the June rise in yields has only taken us to just below the last high point, without topping that mark.

Treasury bond prices, at the long end of the yield curve, seem to have stabilized about 10%–15% higher than their lows last October. Both stocks and bonds seem to have bottomed at the same time.

The high-yield sector of the bond market remains above its moving average. It seems to have stalled out over the last few months. If stocks rally, this sector should follow suit and break out to new short-term highs. If not, a retest of the moving average level seems likely.

Gold, like bonds, declined in June. Although, it is up over 7% year to date.

After a great run-up in the early part of the year, gold began to falter in May. As is usually the case, the rising U.S. dollar has been the culprit. In the following chart, the dollar remains solidly above its moving average, having bottomed as gold topped in the first half of May.

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 more than nine years ago to track the daily price changes in the precious metal.

The indicators

The very short-term technical indicators for stocks that I watch are all bullish. Still, the QFC S&P Pattern Recognition strategy has moved to a negative 80% exposure to the S&P 500 Index.

Our QFC Political Seasonality Index (PSI) strategy had been fully invested but will sell on Tuesday’s close (6/13). Thereafter, the PSI continues a very choppy period, as it buys back in on June 16, sells on June 22, and then returns to equities on June 28. By the time June ends, the PSI signal will have experienced six different buy and sell signals, a very high monthly number for this indicator.

Our QFC Political Seasonality Index strategy was one of our top-performing strategies for 2022. The strategy is available separately and is also included in our QFC Multi-Strategy Explore: Special Equities and QFC Fusion portfolios. (Our QFC Political Seasonality Index calendar—with all of the 2023 daily signals—can be found post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)

FPI’s intermediate-term tactical strategies remain invested. Classic continues 100% long equities. The Volatility Adjusted NASDAQ (VAN) strategy is 160% exposed to the NASDAQ 100, the Systematic Advantage (SA) strategy is 60% in equities, and our QFC Self-adjusting Trend Following (QSTF) strategy is positioned 200% in the NASDAQ. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Notice that our Market Environment indicator, one of our Market Regime Indicators, has switched to a Bull Market regime.

Our Growth and Inflation measure shows that we are in an Ideal economic environment stage (meaning a negative monthly change in the inflation rate and positive monthly GDP reading). Historically, an Ideal environment has occurred 28% of the time since 2003 and has been a positive regime state for stocks and bonds. Gold tends to underperform both stocks and bonds on an annualized return basis in an Ideal environment and carries a substantial risk of a downturn in this stage. From a risk-adjusted perspective, Ideal is one of the best stages for stocks, with limited downside.

Our S&P Volatility regime is registering a Low and Falling reading, which favors equities over gold, and then bonds from an annualized return standpoint. All have had positive returns in this environment, although gold has experienced significant downside risk. The combination has occurred 37% of the time since 2000.

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