Market insights and analysis

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

3rd Quarter | 2021

Market insights and analysis

rss

Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By Jason Teed

The major U.S. stock market indexes fell last week after a significant run-up the week before. The S&P 500 fell 0.31%, the Dow Jones Industrial Average fell 0.63%, the NASDAQ Composite was down 0.69%, and the Russell 2000 lost 1.04%. The 10-year Treasury bond yield rose 11 basis points to 1.56%, as both equities and bonds largely fell for the week. Spot gold closed the week at $1,864.38, up 2.56%.

Five out of 11 sectors were up last week. The Materials and Health Care sectors were the best performers, rising 2.51% and 0.61%, respectively. The Consumer Discretionary sector was the worst performer for the week, down 3.19%.

Stocks

Seasonally, November tends to be the best month of the best quarter of the year for the market. Despite last week’s stumble, that trend is continuing this year. As seen in the following chart, while October typically doesn’t offer much in the way of returns, the market tends to start its “Santa Rally” in November or December.

And it appears that the market may have some underlying strength as well. Looking at the 50-day moving average spread, the market is currently in overbought territory.

However, a look at the number of overbought companies reveals that the market may have more room to run. Currently, less than half of the stocks within the S&P 500 Index are overbought, and more than 10% are oversold. While a drop in the number of overbought stocks could indicate that the current rally is stalling, it also could indicate that plenty of sectors have room to run for rotational traders—and that the market could climb further over the next couple of months.

Adding to the technical picture of the market, COVID cases in the U.S. have significantly fallen off over the past couple of months, and consumer behavior seems to indicate a readiness to behave more as they did in pre-COVID times. Google trends indexes, which track both reopening and work-from-home phrase searches, are showing significant rebounds from lows in March of last year. The reopening index is positive again for the first time since the pandemic began, with a dramatic uptick occurring due to searches for concerts—previously among the riskiest of activities.

The work-from-home index continues to languish, though it remains at elevated levels. It will likely continue to be elevated as working from home becomes more commonplace than it was before the pandemic.

Reopening activities aren’t the only things poised to fuel the economy for the remainder of the year. While spending was down during last year’s Christmas season, this year, spending is largely expected to be up. The Gallup poll of Christmas spending, which tends to indicate the magnitude of consumer spending during the season, is up this year versus last year, indicating at least an average holiday season.

Of course, there are some market headwinds. Inflation continues to be an issue that the Federal Reserve will need to wrangle, potentially increasing rates and slowing economic recovery. Despite this, the market seems well set up for a near-term rise.

Bonds

Treasury yields increased, though they’ve been trading in a range over the last few weeks. The 10-year Treasury rose to 1.56%, off from its recent October high of 1.70%

Yields are still historically low, though rising overall. Credit spreads and term yields both fell for the week. The former indicates a healthy appetite for risk in the market, while the latter suggests lower expectations going forward. Overall, long-term Treasurys underperformed high-yield bonds, and longer-term bonds outperformed shorter-term bonds.

The yield curve shows a slight inversion from 20 to 30 years, suggesting the market may expect rates to decrease in the very long term. The most recent bond bull market lasted over three decades, so this expectation is not unrealistic.

\

Gold

Spot gold rose last week, edging toward the upper boundary of its trading range this year. Other safe-haven assets, such as long-term Treasurys, were down for the week as rates increased. Increasing rates are often a headwind for gold, but the metal was able to gain nevertheless.

Flexible Plan Investments 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

Our Political Seasonality Index began the week out of the market but entered on Wednesday’s close. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.) The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure began the week with no equity exposure. It changed to a small negative exposure on Tuesday, 0.8X long on Wednesday’s close, and 1.6X long on Friday’s close.

Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy began the week 160% exposed. It changed to 200% exposed on Monday’s close, 180% on Wednesday’s close, and 120% on Thursday’s close. The Systematic Advantage (SA) strategy began the week 60% exposed to the market last week. It changed to 120% exposed on Monday’s close, 90% on Tuesday’s close, and back to 120% on Friday’s close. Our Classic strategy is in a fully invested position. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long for the week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, 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 also 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 equity over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2000. It is a stage of high returns and lower-than-average volatility for equities, average returns with high volatility for gold, and low returns and risk for bonds.

 



Comments are closed.