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. stock market indexes were mostly down last week. The S&P 500 decreased by 0.39%, the Dow Jones Industrial Average was down 0.51%, the NASDAQ Composite increased by 0.31%, and the Russell 2000 small-capitalization index lost 0.42%. The 10-year Treasury bond yield fell 1 basis point to 1.62%, taking Treasury bonds higher for the week. Spot gold closed at $1,881.25, up 2.05%.

Stocks

Markets were mostly down last week, except for the NASDAQ. It gained for the first time in five weeks, as the rotation between Value and Growth stocks continued.

It was a light week for economic data. Unemployment claims were at 444,000, slightly less than the 453,000 forecast. The Philadelphia Federal Reserve’s manufacturing index came in at 31.5 (40.8 was forecast), the flash U.S. manufacturing purchasing managers index (PMI) was at 61.5 (60.0 was forecast), and the flash U.S. services PMI came in at 70.1 (64.3 was forecast). Existing home sales were 5.85M, compared to the 6.09M that was forecast. Such flash PMI readings could signal inflationary pressures as well as strength in the U.S. economy.

We’ve been seeing mixed returns during the current rotation between Value and Growth stocks. Bespoke Investment Group has noticed this deviation in terms of breadth at the index level. The S&P 500 breadth, represented by the cumulative advance-decline (A/D) line, has tracked price very closely.

However, the NASDAQ’s cumulative A/D line got worse in May after signs of weakness recognized in late April. As the shading on the following chart shows, the NASDAQ’s cumulative A/D line continues to make lower lows and lower highs. Most of the weakness has come from the Index’s smaller issues; however, due to the overall weighting in the Index, the contribution is not substantial.

Interestingly, the NASDAQ 100’s breadth and price have tracked each other much more closely than the NASDAQ. The Bespoke team explains, “At this point at least, the megacaps of the Nasdaq have provided a solid foundation for the overall index.”

Bonds

Treasury yields decreased last week, sending bond prices higher. The 10-year Treasury continued to hold below 1.65% as of the close of last week.

The Federal Open Market Committee’s April meeting minutes revealed that if the economy continues its rapid progress, it might soon be time to discuss tapering asset purchases, according to some meeting participants.

The 10-year Treasury continues to trade around the 1.60% support level, highlighted in the following chart. Technicians are watching to see if price action can stabilize below the value zone in orange. Holding below 1.60% could signal a pullback opportunity in rates. Last week’s movement may be a sign that investors’ concerns regarding inflation were overblown in recent months and that the possibility of transitory inflation may be more likely.

T. Rowe Price traders reported, “Both high-grade and high yield deals were met with strong demand in the competitive market. The technical environment remained supportive of the asset class, but based on data from Lipper, the pace of flows into municipal bond funds industrywide slowed over the past week.”

Gold

Last week, spot gold closed at $1,881.25, up 2.05%. Gold prices continue to climb following their early May breakout. The metal is now trading well above the nine-month-long bear price channel, as indicated by the two downward-sloping lines in the following chart. As we have mentioned in prior weeks, maintaining price above each level of resistance strengthens the likelihood of the upside breakout. This creates a new value zone in the yellow metal’s price.

Flexible Plan is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction almost nine 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 last week 160% long and changed to 200% long at Wednesday’s close.

Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy was 40% long to the NASDAQ throughout last week. The Systematic Advantage (SA) strategy is 90% exposed to the S&P 500, and our Classic approach is in a fully invested position. Our QFC Self-adjusting Trend Following (QSTF) strategy was 80% long throughout 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 is one of our Market Regime Indicators. It 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 and 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 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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