Most of the major stock market indexes finished moderately higher last week: The Dow Jones Industrial Average gained 0.67%, the S&P 500 Stock Index rose 0.58%, the NASDAQ Composite climbed 0.91%, and the Russell 2000 small-capitalization index lost 0.17%. The 10-year Treasury bond yield fell 4 basis points to 1.87%, sending bonds slightly higher. Last week, spot gold closed at $1,510.56, up $32.34 per ounce, or 2.19%.

Stocks continued their participation in the seasonal rally expected at this time of the year. It looks to be a positive last quarter for the year with the S&P 500 likely posting a 9%-plus gain. In the past, a gain of this amount in the fourth quarter has led to mixed results in the short term but mostly positive performance for the first quarter and the rest of the following year. A gain of more than 25% for the year historically suggests similar results, as well.

Economic news continues to be light and mixed.

The most positive news for the economy this week was that GDP personal spending grew at an annualized rate of 3.2%. It marked the best back-to-back quarters in the measure in almost five years, as the second quarter saw a 4.6% gain. This latter figure almost matches the 4.5% growth in personal income experienced by the lowest-paid U.S. wage earners this year, an additional positive.

Other positive indicators in the last week included new home sales, which increased in November and registered their best three-month increase since 2007. In addition, unemployment claims set a three-week low.

On the negative side of the ledger, durable goods orders fell 2% in November, continuing a downtrend with a report that fell below expectations. And the Richmond Fed’s report on mid-Atlantic business conditions saw a further decline in its factory index and its overall business index, which now is in negative territory.

We will need to await Friday’s ISM manufacturing index reading to see if readings like this in the manufacturing/industrial part of the economy are truly bottoming or if their decline this year is continuing. The USB prediction of fourth-quarter growth reflects the decline, as it expects a reading of 1.7% compared to the 2.1% reading in the third quarter.

The weakness in this sector of the economy, to some extent reflecting the trade war raging during most of the year, together with the three unexpected interest-rate reductions from the Federal Reserve, have put pressure on the U.S. dollar compared to other currencies. This is likely to spur growth in our exports and favor domestic companies with international exposure, as prices of U.S. goods become less expensive in foreign markets.

The dollar weakness also helps explain the current rally in gold. The yellow metal has clearly broken out on the charts. It has bested its short-term trend line and the 50-day moving average of its daily price. (Flexible Plan subadvises the nation’s only mutual fund—The Gold Bullion Strategy Fund, QGLDX—designed to track the daily change in the price of gold. The fund is also available as a tax-deferred, variable-annuity subaccount at the Nationwide—formerly Jefferson National—Monument variable annuity.)

As I mentioned last week, investor sentiment seems overly optimistic. While the stock market has been hitting new all-time highs on an almost daily basis for most of the month, the market gains have pushed investor optimism to new heights as well. This creates a contradictory state of affairs, as the continuing positive momentum is suggestive of future market gains while the positive investor sentiment is pointing to a market turn to lower levels.

After reviewing scores of momentum and sentiment charts, however, it appears that there is some agreement that can be reached between the two types of technical market indicators. The present conditions of both indicators support mixed to lower returns in the short term and average to slightly above-average gains in the longer term.

This prognosis is supported by the state of the seasonal indicators after the end of the present seasonal rally this week. Our Political Seasonality Index (just updated for 2020) points to a short-term January top on the 9th, before turning lower until month’s end.

(Our Political Seasonality Index is available post-login in our Solution Selector under the Domestic Tactical Equity category. The Political Seasonality strategy has been our best performer over the last five years and has topped the S&P 500 Index in return over the last two years while being in the market only a fraction of the time. It is now available as a QFC strategy, meaning that there is little or no FPI advisory fee for the strategy to be billed to you beyond your financial adviser’s regular fee.)

Our intermediate-term tactical strategies are positively situated: The Volatility Adjusted NASDAQ strategy (VAN) has maintained its equity investment position at 200%, Classic continues to be fully invested, and our Self-adjusting Trend Following strategy (STF) remains at 200% invested. VAN and STF both employ leverage—hence the investment positions of more than 100%.

Short-term indicators are maintaining their uniformly positive posture. Our QFC S&P Pattern Recognition strategy’s equity exposure has, however, turned slightly negative.

Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure continues to show that we are in a Normal economic environment (meaning a positive inflation rate and positive GDP). Our Volatility composite (gold, bond, and stock market) is showing a Low and Rising reading, which favors gold and then stocks over bonds—although all have positive returns in this regime stage. During this regime, which historically occurs about 27% of the time, gold has the largest historical drawdown (although of only moderate depth) of the three, just edging out stocks.

Looking into the new year, I think we could be in for some short-term pain before returning to longer-term gains.

The In My Opinion column will return next week after taking a two-week holiday break.

Monday was the first day of trading for our newest subadvised Quantified Fund, with the launch of the Quantified Common Ground Fund (QCGDX). The fund seeks to combine the best stocks meeting the requirements of both ESG (environmental, social, and governance) and faith-based investing. This marks the liftoff of the fourth new Quantified Fund in 2019!

All of us here at Flexible Plan Investments, Ltd., want to thank you for your patronage during 2019, as we registered another profitable year for the financial markets, Flexible Plan, and nearly all of our market strategies. We also wish you all a healthy and prosperous new year!

Jerry

Jerry C. Wagner is Founder and President of Flexible Plan Investments, Ltd. Formerly a tax and securities attorney, Mr. Wagner recognized early on that technology and hedge fund techniques could be applied to help individuals successfully invest, while managing their downside risk. After spending time pioneering new techniques in market analysis, designing quantitative methodologies, and managing investment portfolios, Mr. Wagner founded Flexible Plan Investments in February 1981.

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