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1st Quarter | 2024

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Market Update 12/19/22

By Jerry Wagner

The major U.S. stock market indexes finished down last week. The Dow Jones Industrial Average lost 1.7%, the S&P 500 Index slipped 2.1%, the NASDAQ Composite tumbled 2.7%, and the Russell 2000 small-capitalization index fell 1.9%. The 10-year Treasury bond yield gave up 9 basis points to yield 3.488%, and most bonds increased slightly in value. Gold futures closed at $1,802.50, down $8.20 per ounce, or 0.45%.


Three times since August the stock market has tried to break above its 200-day moving average and the long downturn in equity prices that began just weeks into 2022.

Each time stocks have beat a hasty retreat. As the numbers above demonstrate, it certainly was not pretty last week following the latest attempt. Stocks fell across the board.

Markets continued in a “bad news is good news, and good news is bad” mode. Contrary to the stock market declines, the news was actually mostly good. Inflation data was better than expected and certainly improving. That should be a positive for stocks and bonds. Similarly, the Federal Reserve chose to increase interest rates by “only” 0.5% instead of the higher 0.75% rate announced at the last few Federal Reserve meetings.

But there’s the rub, the Federal Reserve. Chairman Powell’s remarks at the meeting were deemed overly hawkish. And the projections showcased at the meeting were much more pessimistic than those moving the market of late.

As shown in the following table, GDP was projected to be lower in December than it had been in September. But inflation—as measured by the Fed’s favorite measure, personal consumption expenditures (PCE)—was forecast higher. The Fed’s conclusion: The fed fund rate that it controls was seen to be still higher in 2023.

Adding insult to injury last week, the retail sales figures for November were horrible, much worse than expected. Retail sales reports had been one of the underpinnings of the more bullish case for stock prices. They had been rising when all else seemed to be falling.

The technical picture continues to worsen. In addition to the 200-day breakout failures, new lows have increased at an alarming rate, setting off a new sell signal. In addition, despite last week’s sell-off, we have not reached oversold territory. Similarly, extreme pessimism (or any pessimism, really) is absent from the data.

Bottom line: The breakout many hopeful bulls were forecasting has not occurred as yet. I continue to believe that we have not seen the final test of a bottom of this bear market. While seasonality suggests that we could see another rally over the holidays (see the Political Seasonality Index discussion later in the update), it probably will not be sustainable in the new year unless the Fed lets up even more and calls an end to its rate hikes sooner rather than the later that it has been suggesting.


The yield of the Treasury’s 10-year bond has reversed direction. After a sustained uptrend that coincided with the Fed’s move to raise interest rates, the yield shifted sharply lower in mid-October. It has moved swiftly below the usually reliable 50-day moving average and has now settled just under its 21-day moving average at a rate about 1% below its October high-water mark.

Given the way the yield on the 10-year Treasury often tracks its 50-day moving average, I would not be surprised by a turnaround move higher in yields until they once again near that average level. That would be a quarter-point higher than the present level.

As previously discussed, the interest-rate situation continues to be influenced, of course, by the Fed and its preoccupation with inflation. Meanwhile, the market is fighting this influence and has sent the 10-year rate lower based on the lower price of goods.

The Fed, however, is more concerned at the present with stubbornly high and rising rents, and even more importantly, the cost of services and its impact on the labor supply and wage costs. As the following chart shows, services continue to rise in cost.

As a result of the drop in yield, bond prices have risen (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 rallied off their October lows, although the longer-term downtrend remains intact. They are, however, entering an area of price resistance that may send prices lower from here.

The high-yield sector of the bond market has moved higher with both stocks and bonds. It, too, is running into an area of price resistance and may follow either or both of these asset classes lower from these levels.


Gold has spent most of November in rally mode. It reached its 50-day moving average and sliced right through it, running up to a new high midmonth. Since then it has sold off a bit as the dollar has rallied.

As has been the case all year, gold’s decline had been inextricably linked to the rising dollar. However, with better-than-expected inflation news and a moderation in Fed policy a month and a half ago, the dollar suddenly sank dramatically. Its 50-day moving average provided no resistance, and this greatly benefited gold.

Now, however, a return to its 50-day moving average may be in the cards for the dollar, which will not be good for the yellow metal. Last week’s hawkish Federal Reserve pronouncements revived the dollar a bit. This put some pressure on gold, and volatility increased as prices fell midweek.

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 bearish, and our very short-term-oriented QFC S&P Pattern Recognition strategy is only 40% exposed to the S&P 500 Index.

Our QFC Political Seasonality Index strategy has been fully invested since Thursday’s (12/15/22) close. It continues to be one of our top-performing strategies for 2022. It will remain on the offensive until January. 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 2022 daily signals—is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category. A 2023 version will be available in the new year.)

FPI’s intermediate-term tactical strategies are mixed. Classic is fully invested in stocks. The Volatility Adjusted NASDAQ (VAN) strategy is 20% inverse to the NASDAQ, the Systematic Advantage (SA) strategy is 100% in cash, and our QFC Self-adjusting Trend Following (QSTF) strategy is positioned 100% in cash. 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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