Market insights and analysis

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

1st Quarter | 2021

Market insights and analysis

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

By Tim Hanna

Major U.S. indexes ended higher last week, with most hitting record highs. The Dow Jones Industrial Average was up 4.07%, the S&P 500 increased by 2.64%, the Russell 2000 small-capitalization index rose 7.32%, and the NASDAQ Composite was up 3.09%. The 10-year Treasury bond yield rose 6 basis points to 1.63%, as Treasury bonds fell for the week. Last week, spot gold closed at $1,727.11, up 1.60%.

Stocks

Last week, stocks hit record highs while investors continued to watch long-term bond yields and assess their potential impact on the equity markets and economy. Technology shares continued to lag, as the increase in rates theoretically raises the discount rate on future earnings.

In COVID-related news, President Biden directed states to open vaccine eligibility to all adults by May 1 and signed the $1.9 trillion stimulus bill. Checks have already hit some Americans’ accounts.

The U.S. Department of Labor’s core consumer prices increased by 0.1% in February, slightly below expectations of 0.2%. On Friday (March 12), core producer prices rose 0.2%, in line with expectations. Initial weekly jobless claims fell to 712,000 (730,000 forecast), the lowest level since November of last year. The University of Michigan’s preliminary consumer sentiment rose more than expected, coming in at 83 on Friday.

Economic and corporate financial data has been generally upbeat in the markets. However, Bespoke Investment Group uncovered one potentially problematic aspect from a sentiment perspective relating to where the S&P 500 has had the most strength and weakness. Specifically, the S&P 500 has been seeing the majority of its gains during the opening half-hour of trade and significant weakness in the last hour of trading. Not only has the last hour been the weakest in the regular session, but it has also been consistently to the downside. Year to date, the S&P 500 has traded lower in the last hour of trading more than 65% of the time. According to the Smart Money Indicator, “The dumb money has been loading up and the smart money has been selling to them.”

Bespoke noted that over the last 50 trading days, the S&P 500 has traded higher in the final hour of trade only 15 times. There have been only five other periods where the rolling 50-day average fell below 33%, represented by the red dots in the following chart.

In terms of what this could mean from a return perspective, Bespoke looked at performance following such occurrences. Historically, investors experienced some volatility over a couple of quarters, but one year later it looks like bulls were able to push the market to higher levels.

Bonds

Treasury yields increased last week, sending bond prices lower. The 10-year Treasury held above 1.60% ahead of this week’s Federal Reserve meeting. Bond investors are waiting to see whether the Fed will alter its interest rate outlook. Expectations are for the Fed to forecast better economic growth now that President Biden has signed the $1.9 trillion stimulus bill. The 10-year Treasury continues to test the bottom range of the 10-year value zone as indicated by the green horizontal line in the following chart.

T. Rowe Price traders reported, “Heightened new issuance and expectations of forward supply weighed on investment-grade corporate bonds to start the week. However, progress around fiscal stimulus, stability in rates, and two days of lighter issuance provided tailwinds for the asset class, along with eased inflation concerns. Unfavorable technical conditions weighed on the below investment-grade market, however.”

Gold

Last week, spot gold closed at $1,727.11, up 1.60%. Gold continues setting lower lows and lower highs since its peak last year. Currently, trading is at the bottom of the bear channel, indicated by the two downward sloping lines in the following chart. Technically, the metal has room to test the upper bounds of the channel. Also, following last month’s golden cross (when the 50-day moving average crosses above the 200-day moving average), traders are watching those levels closely for resistance, especially the 200-day moving average (in orange on the following chart).

Flexible Plan is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction over eight years ago to track the daily price changes in the precious metal.

The indicators

Our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure started the week with fully leveraged exposure of 200% and maintained maximum long exposure throughout last week.

Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy started the week with 40% long exposure to the NASDAQ, decreased exposure to 20% long at Tuesday’s close, and remained there for the rest of the week. The Systematic Advantage (SA) strategy is 119% exposed to the S&P 500, and our Classic strategy is in a fully invested position. Our QFC Self-adjusting Trend Following (QSTF) strategy was 80% exposed to start last week and increased exposure to 100% at Thursday’s close. 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 Volatility composite (gold, bond, and stock market) is registering a High and Rising reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003. It is a stage of medium returns for all asset classes but with substantial volatility for all but bonds.



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