Weekly Market Analysis - 1/14/2022
With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future. Carlos Slim Helu
For the Week ending 1/14/2022
After a brutal start to the week which saw the SPX off its recently set ATH by more than 5%, and the Nasdaq 100 nearly touching official correction territory, stocks rebounded for much of the rest of the week to close with only minor losses to slight gains. All indices remain in the red for the year, but the strong closing hour for the SPX and NQ may give the bulls some hope that the worst is behind them. There was a large retail sales miss later in the week which could prompt the Fed to slow the pace of the planned rate hikes, though the 7% inflation number sure looks scary for now.
Tech appears to be back in style with the Nasdaq posting the strongest performance on the week, and especially on Friday. Mediocre bank earnings and oversold technicals may have triggered the start of a rotation back into tech stocks if the market no longer believes the Fed will make a policy mistake and over-tighten. Is this the end of the new year mini-correction or is there much more downside to come? Follow the signals from our models, and you won't have to make that judgment yourself.
S&P 500 Daily Chart
The SPX started the week strong with a sizable drop on Monday, briefly falling below the weekly lower Bollinger Band before rebounding strongly to nearly flat on the day. The rebound lasted until Wednesday where the index nearly rose back above the weekly upper BB at 4753 before a huge red day came on Thursday—this one with no immediate reversal. Bulls can find comfort in what appears to be a higher low set in the early morning hours at 4615, well above Monday's panic low of 4581, that was validated by an especially strong last hour of trading on Friday to close the day moderately green at 4663, but still slightly red for the week.
Dow Daily Chart
For the first time this year, the Dow was the weakest index for the week, though it remains the strongest on the year, only down -1.17% YTD. It held up best on Monday's steep decline but finished the week weakest with a sizable drop that failed to recover into the green, unlike SPX and NQ. Nevertheless, the index remains the strongest from a technical perspective on the daily chart, and has pulled back firmly in the middle of the weekly Bollinger Bands. The Dow is the only index that has tested its 200-day SMA in the last year, with a single close below on December 1st before roaring back to an all time high of 36,935 on January 4th.
Nasdaq 100 Daily Chart
After a large drop to start the week that came within 1.6% of touching the 200-day SMA, the Nasdaq 100 quickly rebounded and began an uptrend that lasted until Thursday morning. On that fateful morning, NQ tested 16,000 unsuccessfully for the second time on the week and began yet another large decline, closing down more than -2.5% on the day. The good news for the bulls is that it appears there is a higher low in place set in the pre-market trading of Friday morning at 15,323 on the futures. The cash session was back and forth but finished strongly in the last hour to squeeze out a tiny gain on the week. The index is still in oversold territory, -1.11% below the weekly lower Bollinger Band.
Weekly Economic Statistics
Though the economy appears strong, rates remain historically low and valuations historically high. This is a dangerous combination as the fed continues tapering asset purchases and expects to raise rates in 2022 and 2023, especially as they have now all but confirmed rate hikes are starting even earlier than previously anticipated.
The CAPE and CARP suggest that the market is highly overvalued, and the tightening of liquidity by central bankers could be the pin that pops the bubble in the medium term. Our models factor in all of these statistics and many more and boil them into reliable signals to help you avoid large drawdowns. Try our VIX Basic model totally free.
2022 has started with a bang, and not a good one for the bulls. So far our working thesis of a pickup in volatility this year has played out. Nevertheless, seasonality remains strong and some of the indices are entering quite oversold levels. As we predicted last week, it appears we have at least set a short term bottom on Monday. Whether this is the end of the mini-correction or not we'll defer to closely listening to our models, of which all three free models remain on buy signals for now. Our VIX Basic closed a successful sell signal on Tuesday; if you were following along, you'd have saved 0.2% or about 9% of the drop this year on SPX. These small gains allow you to have more purchasing power for buying dips, and overtime they lead to strong outperformance.
Do we have more volatility to look forward to in 2022? Quite possibly, and if so that would be great news for our models, which always outperform in years of turbulence. In fact, the only way our models outperform is through avoiding drawdowns as they are macro focused and alternate between 100% SPX and 100% cash. Though our models, especially our advanced premium ones, have outperformed the market nearly every year of the bull market, the most striking outperformance came in 2018 which coincided with the worst year for the market as a whole since 2009.