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

2nd Quarter | 2024

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

Market Update 9/16/24

By Tim Hanna

Market snapshot 

•  Stocks: The S&P 500 rose back above its 50-day moving average and ended the week within 1% of its all-time high.

•  Bonds: The 10-year Treasury fell by 6 basis points to 3.65%, and price action remained below the 50-day moving average. According to the CME FedWatch Tool, the probability of a 50-basis-point rate cut in September has increased to 61% as of Monday.

•  Gold: Gold rose 3.21%, setting a new high. It is now trading above 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 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 up last week. The S&P 500 increased by 4.06%, the NASDAQ Composite was up 5.98%, the Dow Jones Industrial Average gained 2.62%, and the Russell 2000 small-capitalization index rose 4.39%. The 10-year Treasury bond yield fell 6 basis points to 3.65%, taking Treasury bonds higher for the week. Spot gold closed the week at $2,577.70, up 3.21%.

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 previous week’s sell-off. The Index remains above its 200-day moving average and is trading at less than 1% from all-time highs. Since the October 2023 low, the market has faced three sell-off attempts: in April, mid-July to early August, and early September.

The S&P 500’s move last week was driven by “buy-the-dip” activity and upside momentum, pushing the S&P 500 within 1% of all-time highs. Mega-cap and semiconductor stocks led the charge. The August core consumer price index (CPI), which excludes food and energy, showed a 3.2% year-over-year increase—still above the Federal Reserve’s 2.0% target.

Monday (September 16) marked 50 days until the 2024 election. Bespoke Investment Group analyzed the state of equity markets and the economy as we approach the first Tuesday in November. On Wednesday (September 11), following the presidential debate and a higher-than-expected CPI report, the S&P 500 initially dropped 1.6%. However, by Friday, the Index had rallied around 4%, marking the 52nd instance since 1990 where the S&P 500 fell over 1% intraday but finished with a gain of over 1% (see the following chart).

Many of these upward reversals occurred during the tech bubble in the early 2000s and the 2008 financial crisis. However, they have also happened during bull market periods. The second chart in the series above shows when upside reversal days occurred within 5% of a 52-week high. Occurrences like those on Wednesday most frequently happened during the bull market of the mid to late 1990s.

Bespoke discovered an interesting statistic. On Thursday, the 176th trading day of the year, the S&P 500 was up 17.6% year to date. The same number of trading days into last year, the Index was up 17.7%, just 10 basis points less than in 2024. The following chart displays the performance paths for both years.

Mega-cap stocks have been major contributors to performance over the past few years. To visualize the effect, the following chart looks at the equal-weight versions of the S&P 500 and NASDAQ 100. Both indexes have been consolidating sideways since late 2021 following the post-pandemic leg higher.

While the equal-weight S&P 500 has slightly surpassed its 2022 high, the equal-weight NASDAQ 100 remains below its 2021 peak. For reference, the following charts show the market-cap-weighted S&P 500 and NASDAQ 100 over the same period. From a technical perspective, if the equal-weight indexes can break out of their multi-year consolidation price structure, they may have room for further gains.

Another interesting fact is that most of the market’s gains this year have occurred outside regular trading hours. If an investor had bought the S&P 500 at each day’s close and sold at the next day’s open, they would be up around 13.8% this year. In contrast, buying at the open and selling at the close would have resulted in just over 3% gains.

It remains to be seen whether last week’s momentum move continues, resulting in an all-time high breakout and resumption of the uptrend, or if it registers as 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, 18.48%) compared to the Invesco QQQ Trust (QQQ, 16.49%). 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 returning to 2X long on August 16. The Fund stepped down exposure at the start of September, moving to 0X by September 5. With the recent reduction in volatility, the Fund signal moved to 2X at Thursday’s close last week.

Bonds

Last week, the yield on the 10-year Treasury fell 6 basis points, ending at 3.65%. Since April’s peak in rates, bond yields have steadily declined with little relief. As of Monday, the probability of a 50-basis-point rate cut by the Federal Reserve in September rose to 61%, according to the CME Group FedWatch Tool, up from 30% at the beginning of September.

The 10-year Treasury has remained below its 50-day moving average for the past few months, a shift from the rising rates of recent years. With the recent decline in yields, it is now trading below the bottom of the sideways channel that began in the latter half of 2022.

T. Rowe Price traders noted, “Tax-exempt municipal bond yields were little changed as investors eyed the heavy new issuance expected over the next few weeks. Muni inflows industrywide for the week ended Thursday represented the second-largest weekly total for the year to date.

“The investment-grade corporate bond market appeared quiet but healthy. Thursday saw the week’s only issuance, and shorter-maturity new bonds outperformed. Strong equity gains and anticipation of the Fed cutting rates at next week’s meeting aided the performance of high yield bonds.”

Gold

Gold rose 3.21% last week, setting a new high and now trading above 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, remains in play.

After consolidation since April, momentum has pushed the metal to a new value zone, attempting 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 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. 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 30% long exposure. Exposure changed to 120% long at Monday’s close, 110% long at Tuesday’s close, and 90% long 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 40% long exposure to the NASDAQ, changed to 20% long exposure on Tuesday’s close, and decreased to 0% exposure 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 at 0X and changed to 200% long at Thursday’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 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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