Market insights and analysis

By Tim Hanna

Market snapshot

•  Stocks: The S&P 500 reached record highs last week on light volume, briefly surpassing the 5,500 level for the first time.

•  Bonds: Last week saw no major surprises in the fixed-income market. Treasury yields rose 4 basis points, trading within a narrow range. Price action is now below the 50-day moving average.

•  Gold: Gold fell 0.47% last week, staying within a relatively narrow trading range. It is now trading below its 50-day moving average after failed support attempts to hold this level. 

•  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 Low and Falling, which favors stocks over gold and then bonds.

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The major U.S. stock market indexes were up last week. The S&P 500 increased by 0.63%, the NASDAQ Composite was up 0.01%, the Dow Jones Industrial Average gained 1.50%, and the Russell 2000 small-capitalization index rose 0.80%. The 10-year Treasury bond yield rose 4 basis points to 4.26%, taking Treasury bonds lower for the week. Spot gold closed the week at $2,321.98, down 0.47%.

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

The S&P 500 Index maintains price action above the 50-day moving average and is trading well above its 200-day moving average. Current momentum has contributed to multiple new highs set throughout June. Since the October low, the market has faced one major bout of selling pressure, the pullback in April.

The S&P 500 reached record highs last week, briefly surpassing the 5,500 level for the first time. Most movements occurred on low volume due to the holiday-shortened week, except for Friday’s heavy volume from quadruple witching options expirations. Gains were broad-based, with only the Real Estate, Information Technology, and Utilities sectors registering losses. Consumer Discretionary led with a 2.5% return, and Energy, Financials, and Industrials gained over 1.5%.

As markets continue pushing all-time highs, Bespoke Investment Group analyzed the impact of new highs in the first half of the year on second-half performance. The S&P 500 has registered 31 record closing highs in the first half of this year, the most since 1998, excluding 2021. However, these record moves lack broad market support, driven mainly by isolated pockets in the market like the Technology sector, specifically Nvidia (NVDA). While the average Technology sector stock is up over 5% this month, stocks in the Materials and Utilities sectors have averaged losses of over 4%. In the 11 instances since 1954 where the S&P 500 had 25 or more new highs in the first half of the year, its median performance in the second half was a gain of 9.6%.

This month has seen above-average divergence between the S&P 500 and market breadth, as measured by the daily advance-decline line. In the past month, there were seven days when the index traded higher when breadth was negative. Since 1990, only one other 20-trading-day period has seen more than seven daily divergences, and only three others have had more than five.

Historically, such divergence doesn't necessarily signal trouble. The following charts show the performance of the S&P 500 Index (the first chart shows the market-cap weighted index, and the second shows the equal-weighted index) in the year after each instance of more than five daily breadth divergences in a four-week period.

The market-cap-weighted index was positive the following year 75% of the time, with forward one-year gains between 21% and almost 31%. The dot-com bubble of the early 2000s, one instance of a negative result, had a forward one-year loss of 19%. The equal-weighted index had positive forward one-year performance but with a wider range. Six and 12 months out, all four occurrences resulted in positive performance.

Taking a related approach, Bespoke also explored the recent performance divergence between the S&P 500 market-cap and equal-weighted indexes since 1990. The following chart shows the historical three-month performance spread for this study. The performance gap has widened to current levels or wider 10 times before, most recently in November 2023.

The following table shows the performance of both indexes the first day after each period that the three-month performance spread first widened to more than 5% in at least three months. The market-cap index was up six and 12 months later, while the equal-weighted index was higher nine out of 10 times in the following months and all 10 times one year later. There was no trend of consistent outperformance between the two indexes. Six and 12 months later, the market-cap weighted index outperformed and underperformed an equal number of times. The current breadth divergence has plenty of precedents, with forward returns being more bullish than bearish following similar instances.

As markets continue to push all-time highs, it is important to incorporate dynamically risk-managed investment strategies that can adapt to changing market conditions as the changes are reflected in asset prices. This is especially important if the longer-term move on weak breadth fails or any future breakout lacks momentum.

When markets exhibit positive momentum, 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.

The following chart shows the year-to-date performance of the Quantified STF Fund (QSTFX, 27.20%) compared to the Invesco QQQ Trust (QQQ, 17.43%). The Quantified STF Fund dynamically trades the NASDAQ 100. It identifies long-term trends within the market to determine exposure, ranging from inverse to a max exposure of 200% long, and has the flexibility to adjust its position daily. The Fund is used within some of our QFC strategies and can be used in our turnkey solutions. QFC Multi-Strategy Explore: Equity Trends is currently overweight the QFC STF Strategy. The Fund has done a good job navigating this year’s market price structure. QSTFX started the year with 200% long exposure, reduced exposure to 100% in mid-April, and reinitiated full 200% leverage on May 9, where it remains.

Bonds

The yield on the 10-year Treasury rose 4 basis points last week, ending at 4.26%.

Last week saw no major surprises in the fixed-income market. The 10-year Treasury traded within a narrow range, maintaining price action below its 50-day moving average. Following the recent decline in yields, the 50-day moving average is now downward sloping.

T. Rowe Price traders reported, “Secondary trading volumes were light despite a heavy issuance calendar. Issuance in the investment-grade corporate bond market was also heavy early in the week, with expectations for total weekly issuance surpassed by the end of the day Tuesday. Somewhat improved investor sentiment and equity gains supported the performance of high yield bonds. Traders noted that signs that the economy could be slowing, along with encouraging comments from Federal Reserve officials about the likelihood of a rate cut later this year, seemed to bolster the performance of risk assets overall.”

Gold

Gold fell 0.47% last week, trading within a narrow range. The “golden cross” (when the 50-day moving average crosses above the 200-day moving average), seen by technicians as a longer-term trend signal to the upside, is still in play. However, gold is now trading below its 50-day moving average. With little support at the initial 50-day retest, traders will look for a downside follow-through on breaks of swing lows to determine if the intermediate-term trend has changed direction. Failed breaks of swing lows could set up gold for a continued upward move if prices start advancing out of this consolidation zone.

Flexible Plan Investments is the subadviser to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 10 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. Our QFC Multi-Strategy Explore: Low Correlation strategy is currently weighted heavily to QFC TVA Gold.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week with 60% short exposure. Exposure changed to 100% short at Monday’s close, 160% short at Tuesday’s close, 180% short at Thursday’s close, and finally to 30% short at Friday’s close. Our QFC Political Seasonality Index favored defensive positioning 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 180% long exposure to the NASDAQ, changed to 200% long at Thursday’s close, and switched back to 180% long exposed at Friday’s close. The Systematic Advantage (SA) strategy is 150% exposed to the S&P 500. 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%.

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 Low and Falling reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003. It is a stage of higher returns and lower volatility for stocks relative to the other volatility regimes.