Market insights and analysis

By Tim Hanna

Market snapshot

•  Stocks: The S&P 500 is attempting a V-shaped recovery following the sharp sell-off on August 5 when the VIX had its largest intraday spike on record since 1990.

•  Bonds: Last week, cooling inflation and the expectation of Federal Reserve rate cuts drove yields lower, pushing the 10-year Treasury down by 6 basis points to 3.88%. Price action remains below the 50-day moving average.

•  Gold: Gold rose 3.15% last week, setting a new high and now trading at the upper end of its bullish price channel.

•  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 Rising, which favors equities 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 3.99%, the NASDAQ Composite was up 5.35%, the Dow Jones Industrial Average gained 3.02%, and the Russell 2000 small-capitalization index rose 2.98%. The 10-year Treasury bond yield fell 6 basis points to 3.88%, taking Treasury bonds higher for the week. Spot gold closed the week at $2,508.01, up 3.15%.

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, the S&P 500 Index rose back above its 50-day moving average following the sharp sell-off on August 5. It is now well above its 200-day moving average. The recent recovery since August resembles a V-shaped move but has yet to test all-time highs. Since the October 2023 low, the market has faced two major sell-offs: one in April and another from mid-July to August 5.

The S&P 500’s move last week was driven by positive news on inflation and growth, raising hopes that the economy may achieve a “soft landing.” The broad-based gains were led by the Information Technology and Consumer Discretionary sectors, while Real Estate lagged but remained slightly positive. Growth stocks outpaced value stocks during the week.

Against this backdrop, Bespoke Investment Group analyzed the impact of volatility, as represented by the CBOE Volatility Index (VIX), on forward performance. On August 5, the VIX spiked more than 40 points intraday, its largest-ever intraday surge since 1990, and closed more than 27 points below its high, its largest intraday decline from high to close on record. It also experienced one of its largest five-day increases and declines. By the close on August 5, the VIX had spiked 21.97 points, its 13th largest five-day increase. It then declined 18.07 points by August 12, marking its eighth-largest five-day decline.

Bespoke studied the S&P 500’s forward performance following the VIX’s largest five-day declines. The following chart and table show instances since 1990 when the VIX declined 15 points or more in five trading days, with no other such occurrences in the prior month. For each occurrence, the S&P 500’s forward returns over one month, three months, six months, and one year are shown.

The S&P 500’s performance after these declines has been mixed over the following one and three months, with an even split between gains and losses. However, six months forward, the S&P 500 only declined following the spike in October 2008, during the great financial crisis. One year later, in all four instances, the S&P 500 was higher, with gains ranging from 6% to 74%.

Although the sample size is small, when coupled with the following percentile analysis, it shows that one-year forward performance for stocks is often strongest following periods when the VIX experiences its largest declines. To increase the robustness of the study, Bespoke ranked every five-day move in the VIX on a percentile basis and grouped the readings into 20 five-percentage-point increments and then calculated the median one-year performance of the S&P 500 for each group.

For one, three, six, and 12 months, the S&P 500’s best returns follow periods when VIX readings were at either end of the spectrum. The 0–5 and 95–100 percentile groups provided the best returns in all timeframes shown (far left and far right bars on the charts above).

When making investment decisions, investors often consider the historical correlations—the statistical relationship between two variables—between different asset classes, such as stocks and bonds. By comparing this year’s price movement to past years, investors can gain insights into potential patterns and trends. Bespoke conducted such an analysis, comparing the S&P 500’s performance in 2024 to every other year dating back to 1928. The following table lists the 10 years with the highest correlation coefficient between closing prices in that year to 2024, showing how the Index performed year to date through August 16 and how it fared through the remainder of the year. The table also presents the maximum gain and loss from August 16 through year-end.

Overall, the average and median performance of the S&P 500 for the rest of the year was better than the average and median for all years, and they were also more consistently to the upside. The Index has historically had a positive return from the close on August 16 through year-end 73% of the time. In the 10 years shown, it was higher 80% of the time.

One significant outlier is 1987, when the Index declined 26% through the remainder of the year. It’s worth noting that, around this time in 1987, the S&P 500 was up twice as much as it is this year.

The 1987 market crash, known as “Black Monday,” saw the Dow Jones Industrial Average fall 22.6% in a single day, highlighting the potential for significant market volatility. According to MoniResearch, Flexible Plan Investments (FPI), operating since the early 1980s, implemented risk-management measures with its systematic Classic strategy during this period. The strategy moved to an all-cash position weeks before the “Black Monday” crash and re-entered equities on October 30, 1987.

While FPI’s approach aims to manage risk, past performance does not guarantee future results. FPI has not always avoided all market losses, but it strives to mitigate the impact of stock market downturns for its clients through various strategies, including market exits and diversification. All investment strategies involve risks and may result in loss of principal. Investors should carefully consider their financial situation, risk tolerance, and investment objectives before making any investment decisions. For a full description of FPI’s strategies, associated risks, and historical performance, please refer to our current disclosures.

It remains to be seen whether the market’s current recovery attempt is a resumption of the uptrend or a retracement in a longer-term trend reversal. This uncertainty underscores the importance of incorporating dynamically risk-managed investment strategies that can adapt to changing market conditions.

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, 24.36%) compared to the Invesco QQQ Trust (QQQ, 16.39%). The Quantified STF 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 and can be used in our turnkey solutions. The Fund has navigated this year’s market price structure well, starting the year with 200% long exposure, reducing to 100% in mid-April, and increasing to 200% leverage on May 9 during the first bout of volatility. During the July to August sell-off, there was a step down in signal, most notably to 80% long on July 25 and then to 0% exposure on August 5. As volatility decreased and markets attempted to recover, the Fund increased long exposure, with the signal recently returning to 2X long on August 16.

Bonds

Last week, the yield on the 10-year Treasury rose 6 basis points, ending at 3.88%. Since the peak in rates in April, bond yields have been trending downward. Cooling inflation and the expectation of Federal Reserve rate cuts have been the primary drivers of this movement. The 10-year Treasury has remained below its 50-day moving average for the past few months, a shift from the rising rates we saw in recent years. With the recent decline in yields, the 10-year Treasury is now near the bottom of the sideways channel that started forming in the second half of 2022.

T. Rowe Price traders noted, “U.S. investment-grade corporate bond market lagged Treasuries on Monday before benefiting from improving risk sentiment through the rest of the week. Most issues were oversubscribed, and total primary issuance was at the top end of estimates. …

“The high yield bond market trended higher on lighter-than-average volumes as equities and Treasuries rallied following the week’s inflation data. Several high yield deals launched as issuers appeared to take advantage of the positive sentiment ahead of the seasonal slowdown period expected over the following two weeks.”

Gold

Gold rose 3.15% last week, setting a new high and now trading at the upper end of its bullish channel price structure. 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.

After consolidation since April, momentum could push gold to set a new price structure above the consolidation zone, marked by the black lines on the following chart. Traders are closely watching the price action, as a failed breakout could result in a retest of the 50-day moving average and a lower boundary of the price channel.

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 80% long exposure. Exposure changed to 0% at Tuesday’s close and remained flat throughout the rest 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 20% long exposure to the NASDAQ and changed to 40% long exposure on 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 160% long, changed to 80% long at Monday’s close, changed to 160% long at Tuesday’s close, and then changed to 200% long at Friday’s close. 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 High and Rising reading, which favors equities over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2000. It is a stage of lower returns and higher volatility for all three major asset classes.