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ETF Current Outlook

ETF Driven Strategy

January Outlook 2022


Tickers in this report: $XLY, $XLE, $XLK

With 2021 behind us, many forecasters make a big deal about the year ahead as if the flipping of the calendar has magically altered the investment landscape. Yes, there are some positive seasonal factors that occur during January because of institutional and retail portfolio flows, but the underlying backdrop normally has not changed very much, if at all. It can be quite overwhelming for an investor. In our process, we just keep our heads down and its business as usual, which is using our data and model intensive research process to objectively analyze what our key indicators are flagging for the highest quality reward and risk opportunities.

Before I get into my recommendations for January, let me remind readers what the goals are:

  • Outpace the S&P500 by actively managing the 11 S&P 500 Sector SPDRs, but also taking on less risk.
  • We are not looking to be super aggressive tactical traders trying to pick every tiny wiggle in relative sector performance.
  • With this being said, we normally have a 6-9 month view, at minimum, try to keep turnover on the lower side, and to beat the S&P 500 by having high Sharpe and Information ratios (i.e., risk adjusted returns).

Although we are beginning a new year, it seems like we just can’t escape the never-ending negative macro headlines that helped keep the Wall of Worry at high levels. We still must deal with COVID, but under a new name that still appears to be highly transmissible but less severe than its older siblings. The inflation genie that was let out of the bottle during 2021 and fueled by policies championed by the Biden Administration is still present and is gaining the attention of both investors and now the Federal Reserve, which is pressuring up interest rates and raising concerns that Chairman Powell and his colleagues will have to act more aggressively than what was expected just a few months ago. There have been some initial knee jerk reactions by investors that have contributed to the recent intra-market rotations.

These moves from one area of the equity market to another based solely on one piece of macro information are sometimes quite violent and frustratingly larger than our research and analytics would suggest, which can create headaches and angst among investors and potential short-term opportunities for professional traders. From our perspective, we are less interested in how markets, sectors, or stocks have performed over the last min, hour, or couple of days, and in our view, you should be less focused on this “noise” as well. More important to us is the 6, 12, and 18-month outlook that is derived by our proprietary research process, and at the sector level that is dominated by our 8-panel analyses and earnings revisions indicator that we call Analyst Sentiment Measure (ASM).

With that being said, our work continues to signal that the corporate profit backdrop and the earnings revisions data are still healthy and likely to be supportive of the U.S. equity market. Importantly, these two factors have been and remain the key underpinnings of our longstanding constructive view.

Additionally, other powerful tailwinds for the equity markets have been the historically low interest rates and accommodative policies from the Federal Reserve. During 1Q22, both will likely get a lot of scrutiny as yields have been moving higher and there are rumblings that central bank policy is about to make an even more definitive hawkish shift. In the short term, there will likely be a lot of discussions and as the Street appears to be raising their expectations for what the FOMC will be doing during the first half of the year. This may cause an increase in tactical volatility and intra-market rotations.

1 week ago
Members Only: FSI Macro and FSI Pro
2022 Portfolio Outlook with Brian Rauscher
Brian will present his 2022 outlook, addressing the following questions. In addition, he will provide his S&P 500 OEPS estimates and price targets, as well sector positioning, and individual stock ideas that should help investors outperform.

Sector Overview

Our new updated sector recommendations are shown below.

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