What Did We Learn from 2021? Just Go with The Flow

It has been an ugly and choppy start to 2022 in the stock market. However, the selling has not come out of the blue as the signs were on the wall. Rising inflation was bound to lead to higher interest rates, and unprecedented government spending paves the way for higher corporate and individual tax rates. In 2021, stocks rose to lofty levels and all-time highs as corporate profits swelled and TINA, or “There Is No Alternative” to stocks, drove capital into the stock market. Record low interest rates pushed the stock market higher as the bullish trend caused capital growth, and dividend yields were substantially higher than those available in the bond market.

Like a game of musical chairs, it seems the bullish music has ended in early 2022, and stocks have taken it on the chin over the past weeks. The VIX index, which measures the implied volatility on S&P 500 stocks, rose to the highest level since 2020 when it nearly hit 39 on January 24. Investors and market participants scrambled to purchase price insurance as stock prices declined, pushing the VIX to a level not seen since October 2020.

Time will tell if we are at the beginning or end of the current stock market correction. While rising interest rates and taxes are bearish, the geopolitical landscape also increases roadblocks to higher stock values.

Last year at this time, the stock market was in a firm bullish trend. In early 2022, alarm bells are ringing as the market experiences more than a bit of turbulence.

Last year it was all about GameStop and AMC

• In early 2021 central bank liquidity kept interest rates at historically low levels.
• Government stimulus prompted lots of spare cash for investing and speculation.
• Some financial social media platforms gave birth to incredible rallies in GameStop (GME), AMC Entertainment Holdings (AMC), and other shares with significant short interests.
• The stock market remained technically bullish in January and February 2021.
  

The year it is all about inflation, geopolitics, and rising interest rates

• Last week, the US Fed said that QE would end in early March and set the stage for an interest rate hike at the March FOMC meeting.
• Inflation is at the highest level in decades.
• Tensions between the US and Russia over Ukraine and the US and China are rising in early 2022.
• Inflation, geopolitical concerns, and increasing interest rates create a potent bearish cocktail for the stock market.
   

The trend has changed - Picking tops or bottoms is a dangerous game

• A close below 4495.12 on the S&P 500 Index on January 31 would put in a bearish key reversal trading pattern on the monthly chart in January.
• The last bearish key reversal was in February 2020, leading to a 35.4% correction.
• Attempting to pick a top or bottom in any market is the same as stating the current price level is wrong.
   

Going with the flow improves the chances of success

• The price of any asset is always the correct price because it is the level where buyers and sellers meet in a transparent marketplace.
• Physics teaches that a body in motion tends to remain in motion.
• Going against price trends in markets goes against a basic scientific principle.
• Sentiment creates market trends and the path of least resistance of prices.
  

The trends will tell you all you need to know

• The news cycle will be working overtime over the coming weeks and months.
• Analysts and “experts” will offer advice via media channels.
• The noise could get deafening.
• All the information you need is a simple price change that shows the path of least resistance or tend.
• Go with the flow as it reflects the crowd’s wisdom.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!