Market insights and analysis

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

1st Quarter | 2024

Quarterly recap



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

Market Update 1/4/23

By Jerry Wagner

The major market indexes finished mostly lower last week. The S&P 500 Index slipped 0.1%, the NASDAQ Composite declined 0.3%, and the Russell 2000 small-capitalization index rose 0.02%. The 10-year Treasury bond yield rose 236 basis points to 3.88% and bonds struggled. The U.S. Aggregate Bond ETF (AGG) dropped 1.0%, and the 20-year Treasury Bond ETF (TLT) tumbled 2.55%. Gold futures closed at 1,826.20, up $30.30 per ounce, or 1.7%.


Surprisingly, the chart above shows that stocks have been mostly range-bound since November. They have been stuck in a sideways pattern that has attempted to break above the 200-day moving average twice recently (there have been six attempts in all). However, they have left stock investors at the bottom of the range and with December losses.

The S&P 500 ended the year just short of a 20% decline, after being down over 25% at one point in 2022. Last year’s decline was the largest for the Index since 2008. The decline left the S&P stuck midway between its 50-day and 200-day moving averages. Given the sideways price formation, the 50-day-moving-average support could provide a bounce this week for another attempt at scaling the 200-day-moving-average level.

At the same time, the NASDAQ completed the year down 32.8%. It, too, could be primed for a rally, as the Index formed a double bottom last week from which a rally could commence.

2022 certainly was a difficult year to traverse. Although the market was definitely in a downtrend, it experienced seven countertrend rallies of at least 5%, and three of those were more than 10%. This made trend following very difficult in 2022. There were lots of opportunities for fake outs and whipsaws.

The commentators continue to debate whether we are headed for a recession, yet as has been clear since at least last July, the economy has been acting like it is already in a recession. A quick review of Bespoke Investment Group’s Matrix of Economic Indicators supports this view. The measure of the year-over-year momentum of its 36 economic indicators has not been worse since the 2020 recession and its 2002 predecessor. Every time the matrix has been at its current level, we have already been in a recession.

The failure of Wall Street to recognize this leads me to believe that stocks will experience even lower price levels in 2023. Employment numbers have been the primary evidence cited by the recession deniers, but recent numbers, while still excellent, have not been as strong as earlier in 2022.

In addition, it’s hard not to recognize the fact that employment payrolls are at or about the same level as before the pandemic began (see chart below). Furthermore, the strength in employment numbers continues to give the Federal Reserve support for its war on inflation. Wage growth is over 5%, and there are 10 million job postings outstanding, 35% more than there were before the pandemic.

The Federal Reserve, as a result, continues its hawkish policies. Not only are interest rates being driven higher, but the Fed has been averaging a $95-billion-per-month exit from the bond market. $12.5 billion was withdrawn in just the last week, and there will likely be more than that this week.

Still, there are some positive indicators that could support a rally in stocks from these levels. Pessimism, no matter how you measure it, is at levels that historically have often paved the way for market bottoms. Inflation measures show that price growth is clearly retreating. Commodity futures have sold off, and supply chains seem to have been restored. Delivery times and shipping costs have declined precipitously from where they were in mid-2022.

Bottom line: Stock prices stalled in the usually buoyant year-end holiday season. The December decline, however, has paved the way for a countertrend short-term rally. However, it’s possible stock prices could go lower in the long term than the bottom they are bouncing off now.


As we previously suggested, the 10-year bond yield did regain its 50-day moving average level last week. But then it faltered. Not only has it broken below this level, but it is also threatening to renew its downtrend with a breakthrough of the shorter-term 21-day moving average.

Once again the bond market is seemingly overruling the Fed. It believes the cooling of inflationary pressures is real and the Fed’s work should be declared “done.” The primary focus of these market makers seems to be the “threat” of recession or, perhaps for some, the realization that we are already in a recession and that the Fed should not make it worse or deeper.

As a result of the drop in yield, bond prices have risen a bit (the movement and direction of bond prices and yields are inversely correlated). As illustrated by the following chart of the long-bond ETF (TLT), which has a maturity of 20-plus years, bond prices have started to rally off their December lows, although the longer-term downtrend remains intact.

The chart also illustrates the incredible volatility of bonds in a rising interest rate environment. Who would have believed as 2022 began that the long-maturity Treasury bond losses for the year would almost match the decline of the volatile NASDAQ stock index? Yet the former fell 32.76% while the bonds declined 31.18%!

The high-yield sector of the bond market has stalled with the stock market. It looks to be running out of steam as it tries to top its 40-day moving average. A decisive move above or below this level will likely set the stage for the direction of the asset class in the intermediate term.


Gold has spent most of November and December in rally mode. It reached its 50-day moving average and sliced right through it, running up to a new short-term high by year-end.

The gain in gold has been mirrored by the fall in the U.S. dollar during the last two months. This is a result of the declining yields experienced in the U.S. bond market, as these investors have moved to higher-yielding alternatives. See the “Bonds” discussion above.

With the present rally of gold in the face of a decline in stocks, it is easy to see the diversifying power of having gold as a part of every investor’s portfolio. This is perhaps harder to see on a long-term basis, as gold did fall in value during the stock market sell-off from March through October. Still, it fell less than the S&P 500, even at its lowest point, and it had less of a loss to recover from. By year-end, gold was virtually flat, while the S&P 500 had fallen close to 20%, bonds 15% to 30%, and the NASDAQ over 30%. Gold’s role as a portfolio diversifier was clearly justified.

Flexible Plan Investments (FPI) 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

The short-term-trend indicators for stocks that I watch remain mostly bearish but are close to flipping positive. And our very short-term-oriented QFC S&P Pattern Recognition strategy is 70% exposed to the S&P 500 Index.

Our QFC Political Seasonality Index (PSI) strategy has been fully invested since Thursday’s (12/15/22) close. It was one of our top-performing strategies for 2022. It will remain on the offensive until January 10, when it will go to its defensive positions. The strategy is available separately and is also included in our QFC Multi-Strategy Explore: Special Equities and QFC Fusion portfolios. (Our QFC Political Seasonality Index—with all of the new 2023 daily signals—is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)

FPI’s intermediate-term tactical strategies are mixed. Classic turned defensive and sold its stock position on Wednesday, January 4. The Volatility Adjusted NASDAQ (VAN) strategy continues 20% inverse to the NASDAQ, the Systematic Advantage (SA) strategy is 60% in equities, and our QFC Self-adjusting Trend Following (QSTF) strategy is positioned 100% inverse to the NASDAQ. 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 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 equities from an annualized return standpoint. The combination has occurred 13% of the time since 2000.

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