This past Monday was the low we had anticipated using our 60 year master cycle, which we covered in the last two editions of this blog. We had anticipated the direction but not the volatility. Our thoughts are that a test of the lows will likely occur on or before Monday January 31st and from there a rally into mid-February. We shall see.
As we stated there is much similarity between this period in 2022 and the international tensions experienced in 1962. Moscow and Washington DC were in a standoff over a third country, Cuba, in 1962 and today they are at odds over Ukraine. Today as in 1962 there is much bellicosity on both sides adding to the volatility in the markets. It is a true binary event, peace or war. History rhymes as they say.
In review we believe that 2022 will be a down year but there will be opportunity on both the long and short sides of the markets. Monday provided opportunity for both sides in spades. A probable test of Monday’s lows should do the same. The lows must hold or additional selling will undoubtedly erupt. There are three ways to have a successful test, one a higher low close to the low being tested, two a double or triple bottom where price matches the low, or three a test where the low being tested is undercut, but price closes above the low being tested. That is what we will be looking for, a successful test.
Underneath the surface the market has been in a rotation/correction for some time as evidenced by the IBD-50 growth ETF (FFTY) which has markedly underperformed over the last year. While the major indexes which are capitalization weighted were hitting new highs, small and mid-cap growth was underperforming. As one friend pointed out years ago, bear markets begin by hiding under cover of the averages hitting new highs at the tail end of a bull market.
Bottoms can be seen quite clearly in real time while tops are a process. It’s really only after time has passed that one can make out “The Top”.
So what is a trader / investor to do in this environment where almost every chart looks busted? We suggest that a watch list of relative strength plays for the long side and a list of broken high P/E stocks for the short side. In addition, former unicorns that have gone public in the last year that are concept stocks with no earnings prospects for the foreseeable future will in all likelihood continue to sell off, especially if revenue growth begins to fall below expectations.
Screening for best performers since the beginning of the year shows that energy and especially energy services (drilling, oil and gas) to be of interest. Also natural resource stocks both in North America and in emerging markets like Brazil also shows promise. On the short side, stocks or ETFs that had been leaders in the past bull market that have broken down / failed are promising hunting grounds for shorts, as leadership in the last bull market rarely become the leadership in the next bull market.
Happy hunting and stay safe.
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