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 2/6/23

By Tim Hanna

The major U.S. stock market indexes were mostly up last week. The S&P 500 increased by 1.62%, the Dow Jones Industrial Average lost 0.15%, the NASDAQ Composite was up 3.31%, and the Russell 2000 small-capitalization index rose 3.88%. The 10-year Treasury bond yield rose 2 basis points to 3.52%, taking Treasury bonds lower for the week. Spot gold closed the week at $1,864.97, down 3.27%.


Equity markets finished the week higher, continuing their momentum from the beginning of this year. Investors speculated that a positive fourth-quarter employment cost index release could increase the chance that the Federal Reserve will pause its rate-hike cycle sooner than anticipated.

On the economic data front, ISM Manufacturing PMI came in at 47.4, slightly less than the 48.0 forecast. Values below 50.0 indicate industry contraction, while values above 50.0 indicate industry expansion. ISM Services PMI was 55.2, above expectations of 50.5. Unemployment claims were 183,000, while consensus expectations were 196,000. The unemployment rate was at 3.4%, less than the 3.6% forecast. Nonfarm employment change came in at 517,000, higher than the 193,000 expected. Average hourly earnings month over month were in line with expectations at 0.3%. The Federal Reserve raised the target fed funds rate 0.25%, as anticipated, on Wednesday (February 1).

The S&P 500 Index broke out of its yearlong bear channel and continued to maintain price action above the upper trend line. The S&P 500 has also recently experienced higher lows and a golden cross (when the 50-day moving average crosses above the 200-day moving average). From a technician’s perspective, both signals are considered bullish and could indicate a new trend formation on an intermediate-term basis. Of interest will be a retest of the breakout point and/or a test of support at the 50-day and 200-day moving averages.

After a year filled with bear market rallies and whipsaw movement, the market looks positive from a technical perspective. Yet investors fear that the move may not be sustainable as traders weigh the economic outlook.

The S&P 500, which is now above the 200-day moving average and within a golden cross, is breaking out of the downtrending channel it set last year. Investor expectations of a soft landing (taming inflation without sparking a recession) are leading this move, but are they in line with the future reality? Inflation could resurface following the Federal Reserve’s eventual pause, which is now expected to be sooner rather than later. Some analysts are even predicting a rate cut this summer.

Bespoke Investment Group compared what’s driving market performance now and in the past. As mentioned earlier, the unemployment rate came in lower than expected last week. The last time the unemployment rate in the U.S. was at 3.4% was May 1969. A concern is that inflation could reaccelerate due to tight labor markets.

Also, the Fed’s actions depend on how much members believe the economy will slow. So the question is, how much will the Fed’s actions slow the economy in the future, and when will markets experience the ramifications? Will the Fed’s actions end up being too little, too much, too soon, or too late? We won’t know until it becomes history.

In addition to the S&P 500 breakout, the Russell 2000, with a similar backdrop, tested the highs from last summer. The NASDAQ 100 has also broken its downtrend, but it hasn’t experienced a golden cross yet. The Dow Jones Industrial Average, with a unique price structure relative to the other major indexes, is on the verge of breaking out to new highs. After experiencing a golden cross over a month ago, the Dow is trading right below a line of horizontal resistance and is close to its 50-day moving average. According to Bespoke, that breakout would establish a loose head-and-shoulders bottom that would target a dramatic rally if it was confirmed with a close around 35,000.

The following chart shows the average performance of stocks by decile of various attributes. Year to date, stocks with the highest and lowest revenue growth, price-to-sales multiples, and price-to-earnings multiples have been the best performers. With some potential mean-reversion at play, stocks that were down the most last year have been the biggest-gaining decile with an average return of almost 40%. Interestingly, last year’s decile of biggest winners is down 0.3% year to date on average.

Stocks that were further below their 200-day moving averages at the end of last year have tended to be top performers in 2023. The decile of most oversold stocks is up over 38% year to date. Big gains also came from stocks with lower market caps and the least-positive analyst ratings as of the end of last year.

Stocks with the lowest international revenue exposure have performed the worst, while the U.S. dollar’s decline this year has boosted stocks with the largest overseas revenue streams. Stocks with high short interest have also been outperformers, with the most-shorted decile of companies up 36% year to date on average.

Whether the present up move is sustainable and how far it will run are unknown. Markets could be overly optimistic, and investor sentiment can quickly turn negative as prices move down, resembling the price action experienced last year. Unforeseen events could also sharply turn prices, similar to what investors experienced during the COVID-19 crash.

Dynamically risk-managed strategies are able to respond to changing market conditions as the changes are reflected in asset prices. As markets have moved higher off lows set in the fourth quarter and experienced less downside volatility recently, a number of our momentum-based strategies have moved into and are still in more risk-on positioning. Also, strategies that were inverse a few months ago have reduced, eliminated, or even flipped their short exposure.

If prices continue higher with low volatility, systematic trend-following algorithms are designed to recognize the price momentum and participate in a risk-on fashion. If volatility resurfaces and prices turn south, systematic momentum strategies are designed to identify the change and move to more defensive positioning.

The following chart shows the one-year performance of the Quantified Managed Income Fund (QBDSX, -4.0%) compared to the iShares Core US Aggregate Bond ETF (AGG, -10.3%). The Quantified Managed Income Fund is an actively managed income fund that can seek various income classes as well as the safety of cash when market exposure is undesirable. The Fund is a key defensive component in several actively managed strategies at Flexible Plan Investments.


The yield on the 10-year Treasury rose 2 basis points, ending last week at 3.52%. The bond market continued to see relief from its battle with a long-term trend of rising interest rates. The 10-year Treasury experienced resistance at its 50-day moving average (green line on the following chart), which was seen as a level of support for most of last year. However, significant price action below has occurred since mid-November. Technicians are watching how this pullback evolves. A breakout of the downtrending resistance (black downward sloping line on the following chart) could signal a continuation of a rise in interest rates.

T. Rowe Price traders reported, “Investment-grade corporate credit spreads moved tighter (indicating strong performance relative to Treasuries) over the week, with more volatile corporate issues outperforming. Technical conditions were generally supportive as trading volumes in the secondary market were above daily averages and primary issuance took a pause in the days leading up to the Fed’s monetary policy meeting.

“High yield bonds tracked equities higher, and the broad risk-on sentiment throughout most of the week led to expectations for the volume of new high yield deals to pick up.”


Gold pulled back last week, locking in a loss of 3.27% following a substantial upward move that started from its breakout in mid-November. The yellow metal is now trading right above its 50-day moving average, which is considered its first major level of support.

Until November, the U.S. dollar’s strength (the purple line in the following chart) had made it difficult for gold to rally. A strong dollar is a restraint on global liquidity and a headwind for inflation in the U.S. In general, a stronger dollar lowers the price of imports. During gold’s pullback last week, investors saw the U.S. dollar retrace the downtrend it started in November. The U.S. dollar and other non-equity or bond exposures are available asset classes for consideration within certain strategies at Flexible Plan Investments.

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

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started the week with 60% short exposure. Exposure changed to 70% short at Monday’s close, 30% short at Tuesday’s close, 40% short at Wednesday’s close, and 80% short at Thursday’s close. Our QFC Political Seasonality Index favored defensive positioning from Tuesday’s (January 31) close last week. (Our QFC Political Seasonality Index is available—with all of the daily signals—post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)

Our intermediate-term tactical strategies have been varied in their degree of defensive positioning. The key advantages these strategies offer to investors are their ability to adapt to changing market environments, participate during uptrends, and adjust exposure to more defensive posturing during downtrends.

The Volatility Adjusted NASDAQ (VAN) strategy started the week with 0% exposure to the NASDAQ and changed to 20% short at Monday’s close, remaining there to end last week. The Systematic Advantage (SA) strategy is 120% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy was 100% long throughout last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model was invested in stocks throughout last week. Most of our Classic accounts follow a signal that will allow the strategy to change exposure in as little as a week. A few accounts are on platforms that are more restrictive and can take up to one month to generate a new signal.

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 stocks from an annualized return standpoint. The combination has occurred 13% of the time since 2003. It is a stage of higher returns and lower volatility for bonds relative to the other volatility regimes.

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