The market has been experiencing some challenging price action thus far in 2022, but for our readers, the bumps should not be a total surprise as we have been suggesting that 1Q22 would likely see some turbulence. We at FSInsight recognize that periods like the last two weeks can be scary and unsettling, especially if your portfolio is suffering. My colleagues and I empathize with our subscribers when this occurs as we take our responsibility of providing valuable insights in both up and down markets.
We are providing today’s First Word comments for two reasons.
First, we wanted to remind readers that fear, and red screens lead to lousy emotional decision-making, and that’s why I believe during times like these, objective, data-driven, and time-tested tools like my proprietary models are essential and valuable tools to help increase our probability of success. Importantly, my outlook for the next 6-12 months for the overall equity market, sectors (see FSI Sector Allocation), and individual stocks (see Brian’s Dunks) has not changed as our key indicators have not flashed any important signals to deviate at the time. I have used the following expression a lot during the last six months, but it is still appropriate — STAY THE COURSE and let’s use extreme market action opportunistically.
Second, and more importantly for today, we are providing some flash comments regarding the overall equity markets as we got some important new signals.
My most aggressive tactical indicators have flashed a trading buy signal (HALO-2 & V-squared) reached negative extremes and positively inflected intra-day today as shown in Exhibits 1 & 2 below.
This is quite similar to the behavior that we saw at both the 12/26/18 and 3/23/20 trading lows that saw the S&P 500 get slammed on a Friday options expiration only to find a trading bottom the following Monday before noon. Thus, my work suggests that a trading low is likely in, but I am less certain if THE 1H22 low has been reached because the market still faces the issues of the Fed, whether inflation is peaking, and whether COVID is rolling over. These stories have not run their respective courses yet. So, it looks likely there is some opportunity for aggressive traders as well as for strategic investors to use the expected bounce to look for higher quality stocks that have been overly sold off.
As readers may or may not know, I do not make many tactical calls like this over time as my main focus is earnings revisions and a 6-12 month outlook. However, there are times when my work allows me to step up to the tactical microphone and share my views. The last time that my work provided an opportunity like this was on March 20, 2020, when my key indicators flashed that a major bottom was imminent.
Along with my tactical tools signaling some type of low is in place, it looks like VIX has tactically topped near 40, as shown below in Exhibit 3. It appears that the strong 2yr treasury action was a catalyst as the fears about a 50bps Fed hike in March that appeared last week now looks as if it may have been overdone (see Exhibit 4 below).
Putting this all together suggests aggressive investors can take a shot with this morning’s intra-day low as a stop-out.
If my indicators are correct, I will be monitoring this bounce and my key tools to determine if this rally will fail or make new highs. At the moment, I am skeptical if the S&P 500 can go right back to the old highs and above, but I am open to the idea to see how my indicators develop over the next week or more.
The immediate wild card here is obviously the Fed meeting this week. An overly hawkish stance by the FOMC would likely throw cold water at this trading bounce. Importantly, however, if investors can come away with a Fed in motion but not overly aggressive, this bounce could have legs.
In addition, let me remind you that I have been bullish and have been expecting trouble during 1Q22/1H22, but my work remains constructive for equities for 2022. I am not changing any of my medium/longer-term views that any selling we get here during 1Q22 is not an end move, but a pullback/correction in an ongoing bull market.
Below are my slides from my recent Year Ahead Outlook webinar earlier this month.
Click Here for our Portfolio Strategy Report:
In the coming weeks, we will update our FSI Sector Allocations and continue to keep an eye on our new single stock product, Brian’s Dunks.
Exhibit 1: Aggressive Tactical Indicators — Reached Negative Extremes…
** NOTES – The proprietary Fundstrat Portfolio Strategy V-squared indicator shown in the top chart (orange line) shows the ratio of VXV (the 3-month CBOE S&P 500 Volatility Index) and the VIX (the 1-month CBOE S&P 500 Volatility Index). This tool is also useful for identifying aggressive tactical trading bottoms for the S&P 500.
The proprietary Fundstrat Portfolio Strategy HALO-2 Model, which is the purple line in the lower chart shown above, is the raw tactical data behind our standard HALO multi-factor model described on the previous page. It is useful for identifying aggressive tactical trading bottoms for the S&P 500.
Exhibit 2: …Intra-day Positive Inflection — Likely Trading Bottom
Exhibit 3: …VIX Spikes and Rollovers are Normally a Bullish Trading Signal
Exhibit 4: …2-yr US Treasury Yields Settle Down (For Now)
