Risk trends, fundamental themes, technical models – what I’m watching until 2022

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‘Risk’ Assets, S&P 500, COVID, Dollars, and Rate Talking Points

  • Risk appetite will open 2022 on solid footing, but the disparity in relative performance may be as remarkable as benchmarks like US stocks hitting record highs
  • Seasonality statistics suggest the benchmark S&P 500 ‘risk’ measure is averaging its best performance of the year in the first week and January is generally strong
  • Traders have been keenly aware of the fundamental issues behind the scenes and skillfully ignored the concerns, but this is unlikely to last forever.

Risk appetite is strong … for certain speculative measures

As we close the trading year, I find that the dominant theme of speculative appetite trumps the fundamental concerns so prevalent throughout 2021 has maintained its control until the last hours. There have been a few seismic changes in the financial system over the past 12 months, including: an ongoing recovery from the pandemic; a decline in new fiscal stimulus measures; a boom in retail trade; and sluggish global monetary policy. Yet throughout the turmoil, confidence – or more reasonably “the appetite for” – to ride the bullish wave persisted. Even though I see it every year, the number of people who have told me that they are giving up fundamental and / or technical analysis because it ‘doesn’t matter anymore’ is perhaps as high as I am. ‘ve seen in ten years. Conviction always matters, but it can be watered down when it’s drifted into a crowd. While there is a high likelihood that risk appetite will continue to be costly in the first few weeks of the new year, the disparity between different speculative measures suggests that there is an exaggeration that will subside. In particular, I watch the Nasdaq / Dow, S&P 500 / rest of the world indices, equities / other ratios where exuberance has reached obvious extremes.

Graphic the performance since the start of the year of “risk assets”, including the S&P 500 (Daily)

Graphic created on John Kicklighter with Bloomberg Terminal data

I consider myself more of a skeptic and tend to question the dominant trends, whether they are bullish or bearish, “at risk” or “without risk”. There are a lot of issues I take with the dominant speculative asset lead led by the S&P 500, but the value is crowd determination rather than my own perspective. Seeking the crowd’s opinion, I conducted a Twitter poll of traders still in attendance and the majority (46%) of those who responded responded that they believed the bull would not weaken until in the first quarter of 2022. Only 24% thought we would. dealing with significant risk aversion. This projection seems to fit the probabilities based on the historical context, but it also highlights a disparity that can be problematic via the “potential”. Although an extension of the dominant trend is more likely, the impact of an unexpected decline would have a more severe impact on the markets.

Survey: what do you expect from risk assets in the first quarter of 2022

Risk trends, fundamental themes, technical models - what I'm watching until 2022

Twitter.com poll, @JohnKicklighter

Strong seasonal assumptions to calm the uptrend

For those looking to reassure themselves of a predetermined bullish outlook until the start of the new year, they need look no further than the seasonality statistics of the S&P 500. Historically (since 1900), the he US benchmark recorded its best week on average. of the entire calendar year up to the first week of exchange. Basically, this would suit the expected reinvestment actions that typically occur after the year-end accounting rebalance. Yet where assumptions are most entrenched, inevitable deviations can be the most disruptive. There are certainly exceptions to the “opening week rally” rule in history, and some have proven to be exceptionally volatile (2016, 2015, 2009, etc.). In general, I think these markets require more attention rather than less so that we can assess and respond to conditions.

Average weekly performance of the S&P 500 by calendar week

Risk trends, fundamental themes, technical models - what I'm watching until 2022

Chart created by John Kicklighter using data from the S&P 500

Widening the horizon beyond the only opening week of the year, the entire month of January tends to favor the bullish theme. A new year can mean new opportunities for those who think they’ve missed out on the best of the past 12 months. However, over time more systemic fundamental issues will come into focus to play a critical role. Growth issues, the resurgence of coronavirus cases and changing monetary policy trends will weigh heavily in investors’ minds, and even in their conversations. For those who feel intimidated by the task of keeping the pulse of the markets as a whole, I find the volatility and volume / participation metrics to be strong indicators of tidal changes rather than just noises. Both are currently very low – and not just for the time of year.

Average performance of the S&P 500, VIX volume and volatility by calendar month

Risk trends, fundamental themes, technical models - what I'm watching until 2022

Chart created by John Kicklighter using data from the S&P 500

The big fundamental disruptors who can get us out of a collective complacency

If we are in a “constant trend unless something unexpected happens to us” situation, then it makes sense that we spend time considering the main likely disruptors that may disrupt the peaceful build-up of speculative exposure. . One of the more interesting catalysts of the recent past that has seen the market almost balk at its influence recently is the recent surge in coronavirus cases. The global daily number crossed the 1.7 million mark at the very end of the year, but the number of Covid-related deaths notably fell to a 14-month low. The less lethal variant of omicron has been viewed by some as a real boon to the market, but I wouldn’t put it in such a bullish light. If governments decide to restrict consumer mobility or trade due to the virus, the impact will ultimately be detrimental. Another topic often overlooked without favorable interpretation is the risk posed by China. The country’s organic growth prospects and the global implications of its financial problems with real estate developers like Evergrande (which has missed several debt repayments to foreign investors) are very important prospects. Only the opacity of the country’s data kept the market optimistic.

Global Covid Death Reports (Daily)

Risk trends, fundamental themes, technical models - what I'm watching until 2022

Chart from Google.com with data from multiple sources

Another fundamental theme of great importance for 2022 is the change in global monetary policy. It is no exaggeration to say that the accommodative policies of the past decade (near zero interest rates and large-scale asset purchase programs) have played a major role in the market until today. . Some may look at the size of the aggregate balance sheets of major central banks and consider its correlation with benchmarks like the S&P 500 and say it’s a fluke. I think this is a causal relationship in which the abundance of funds has caused people to take even greater risks to keep pace with the “market”. Removing this asset inflation will not be without impact, but I still think it is necessary. Economies and markets that cannot function on their own are ultimately unhealthy. This has serious implications for the global market, but in these early days, the start and stop between different policy groups is likely to represent strong opportunities for individual currencies (or regional assets). I will definitely be watching the Dollar and EURUSD to start 2022 as they are in an extremely narrow 30 day range as volatility over the same period remains exceptionally high.

Graph DXY with 100-SMA, US-German 10 years, 30 days ATR and historical range (Daily)

Risk trends, fundamental themes, technical models - what I'm watching until 2022

Graphic created on TradingView platform

New fundamental developments at this point are more likely to lead to a deviation from the complacency that has kept markets bidding. Given that perspective, I posed the question of “gray swans” (seemingly unlikely but achievable events that can have an extreme impact) to the folks on Twitter. As you can see from the results, most believe that the greatest thematic risk to the uptrend is unintended fallout from efforts by the Fed and other central banks to pull out of the market. Do you agree?

Poll: The most likely ‘gray swan’ of the first quarter of 2022

Risk trends, fundamental themes, technical models - what I'm watching until 2022

Twitter.com poll, @JohnKicklighter

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