Market insights and analysis

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

2nd 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 mixed last week. The S&P 500 increased by 1.57%, the Dow Jones Industrial Average was up 1.36%, the NASDAQ Composite was down 0.58%, and the Russell 2000 small-capitalization index lost 2.88%. The 10-year Treasury bond yield fell 4 basis points to 1.68%, as Treasury bonds rose for the week. Last week, spot gold closed at $1,732.52, down 0.73%.

Stocks

Last week, stocks were mixed as investors weighed inflation and interest-rate risks against optimism regarding economic reopening. Dampening the optimism were the rising number of infections in the U.S. and another round of lockdowns in Europe. However, President Biden is aiming to distribute 200 million doses of COVID-19 vaccines in his first 100 days in office, double his original goal, and several states plan to open vaccinations to all residents over the age of 16 soon.

February’s severe winter weather ushered in some disappointing economic data. Existing home sales for February fell 6.6%, approximately twice the decline expected. New home sales fell 18.2%, almost triple the predicted shortfall.

On the other hand, initial weekly jobless claims fell more than expected to 684,000 (727,000 forecast), the lowest level since the pandemic began, and the University of Michigan revised March consumer sentiment higher to 84.9 (83.6 forecast).

March 23, 2020, marks the market low that occurred during the start of the pandemic. Since those lows, the rolling one-year percentage changes for the major indexes are as follows: S&P 500 (75%), NASDAQ 100 (86%), and the Russell 2000 (125%). Bespoke Investment Group studied the one-year rolling percentage changes historically, and the data is quite interesting. The S&P 500’s 75% return was its strongest since the 1930s. The NASDAQ 100’s 86% gain was its strongest since the tech bubble in the late 1990s. The Russell 2000 set a record in this study with its 125% gain, the largest since the start of the index in the late 1970s.

Market history tells us that it’s difficult to expect moves like this to continue. At these levels, equity markets historically have pulled back and/or experienced sideways market risk, which is why investors may want to look for ways to help protect these types of gains.

Trend-following strategies that are more reactive will attempt to continue riding the upward trend until downside risk emerges, at which point they will begin taking risk off the table. The goal is to lock in as much profit as possible while managing the downside risk. Flexible Plan’s QFC Self-adjusting Trend Following strategy is a good example of a strategy that seeks to accomplish this.

Bonds

Treasury yields decreased last week, sending bond prices higher. The 10-year Treasury held below 1.70% to end the week.

Inflation has been a top concern for bond investors during the rise in rates over the past six months. However, at present, inflation data remain muted. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell testified before Congress on Wednesday (March 24), both stating they saw little danger of an overheating economy.

The 10-year Treasury has broken back into the 10-year value zone, as indicated by the green horizontal line in the following chart. Technically, this will be a level to watch in terms of support to keep the 10-year above 1.50%.

T. Rowe Price traders reported, “Stability in the 10-year U.S. Treasury note’s yield aided the performance of high yield bonds. However, the asset class experienced some weakness due to ongoing virus concerns across Europe. Below investment-grade funds industrywide reported negative flows.”

Gold

Last week, spot gold closed at $1,732.52, down 0.73%. Gold continues setting lower lows and lower highs since its peak last year. The yellow metal remains near the bottom of the bear channel, indicated by the two downward-sloping lines in the following chart.

Following last month’s death cross (when the 50-day moving average crosses below the 200-day moving average), traders are watching those levels closely for resistance. The 50-day moving average is roughly midway within the bear channel at the moment. This would be the first line of resistance, followed by a 200-day moving average that is still outside of the bear-channel price structure (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 maintained a 190% long equity exposure throughout last week. The strategy’s maximum long exposure is 200%.

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, increased exposure to 80% long at Tuesday’s close, increased exposure to 100% long at Thursday’s close, and reduced exposure back to 80% long at Friday’s close. The Systematic Advantage (SA) strategy is 106% 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 100% exposed throughout all of last 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 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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