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Attempt to summarize 2021 in a single phrase.
“Rotational.”
“Unsure.”
“Risky.”
Maybe the entire above?
This yr has been all about management rotation, with progress names, worth shares and even defensive sectors all spending a while because the strongest performers in a given month. This has been a yr of unsure instances and competing narratives, from the Fed’s makes an attempt to deal with elevated inflation ranges, to the projected financial increase of elevated infrastructure spending, to the power unknowns of the COVID-19 pandemic. And, after 2019 and a comparatively low volatility atmosphere, adopted by 2020 with its all-time excessive ranges for the VIX, 2021 was someplace within the center.
So how can we make sense of this yr from a technical perspective?
Listed here are my prime 5 charts of 2021, which I consider inform the story of this yr. And I really feel that they inform of a difficult yr, given all of the uncertainties, but in addition present loads of classes on the way to handle a portfolio when the longer term is actually unknown.
First, now we have what I name the Market Pattern Mannequin.
Years in the past, I attempted to create a scientific trend-following mannequin that will mirror how I used to be viewing the general market development on three time frames: short-term (a pair days to some weeks), medium-term (a pair months to some years) and long-term (a few years). My Market Pattern Mannequin makes use of exponential transferring averages to find out the development on every of those time frames, and I’ve discovered {that a} common assessment of this chart throughout my Morning Espresso Routine permits me to maintain a correct deal with the general development within the fairness markets.
The long-term mannequin turned bullish in June 2020 and remained bullish by means of all of 2021. Given the persistent power in shares and repeated new all-time highs for the S&P 500 and Nasdaq 100, this makes good sense.
On the medium-term time-frame, the mannequin turned optimistic in Might 2020 and likewise remained bullish by means of the course of 2021. I really tweaked the medium-term portion of the mannequin earlier this yr, as my earlier model turned destructive in Might 2021 and remained bearish because the S&P pressed on to new highs into the autumn.
This was a unbelievable lesson on creating a course of and staying constant throughout your day-to-day to make use of of the method — however do not be afraid to regulate your inputs should you discover that market circumstances have modified!
The medium-term mannequin is what I take advantage of as a primary risk-on/off gauge for equities. Ought to I be pondering extra about potential reward or potential threat in my portfolio? The constant bullish studying right here tells me the stay constructive and to maintain searching for lengthy alternatives given the general power out there development.
Lesson #1: Do not battle the development!
My second chart for 2021 is the day by day S&P 500 chart, utilizing day by day value bars together with RSI and help/resistance ranges.
The day by day S&P chart demonstrated the restricted pullbacks that we skilled in 2021. Throughout a mean yr within the fairness markets, it is cheap to count on at the very least one good corrective transfer of over 10% down. We simply did not see that in 2021!
Whereas the constant uptrend from the weekly chart was definitely one key theme for equities, this chart reveals how that upside was paired with restricted draw back as properly. A primary method of shopping for each time the S&P touched its 50-day transferring common would have confirmed to be a reasonably profitable technique!
It is also price noting right here that we noticed 4 bearish momentum divergences in 2021. The deepest drawdown after a bearish sign was solely 5-6%. So, whereas the bearish divergence in November and December seems fairly destructive on the floor, the fact has been a lot much less destructive by means of the course of the yr.
Lesson #2: New highs and better lows are the signal of a wholesome bull market section.
Subsequent, let’s assessment certainly one of my favourite market breadth indicators, the Bullish % Index.
The Bullish % Index is derived by reviewing the point and figure charts of all 500 members of the S&P 500 index. Was the newest sign on every chart a purchase sign or a promote sign?
This index provides the proportion of the five hundred charts that are presently on a purchase sign, and is one other approach of measuring general market participation. The index has dipped under the 50% stage 9 instances because the starting of 2020. In eight of these cases, the indicator turned again above 50% inside per week or so of first dipping under 50%. In every of these instances, the S&P 500 rallied quickly after and often pushed to new highs. The ninth incidence was in Feb 2020, the place the index moved properly under 50% and remained under this stage for nearly six weeks.
Years down the highway, once I take into consideration the yr 2021, I could name this “The 12 months of Buyable Dips”. Just about each pullback was a possibility to leap in and journey the following leg larger. In 2022 and past, I will probably be conserving a detailed eye on this chart and evaluating subsequent indicators to this yr’s “purchase on the dips” mentality.
Lesson #3: A powerful uptrend will typically present loads of alternatives to purchase in on short-term weak spot. Use a breadth indicator to determine these potential entry factors.
Now let’s assessment a sequence of risk-on vs. risk-off measures utilizing market breadth and sector rotation. This chart has change into so necessary to me through the years that I typically simply confer with it as “The Chart”.
From the highest, now we have the S&P 500 on a closing foundation, the cumulative advance-decline line of the New York Inventory Trade, the ratio of Client Discretionary to Client Staples, the relative efficiency of the SPY versus the Utilities sector, and the brand new 52-week excessive and lows for the S&P 500 members.
The advance-decline line is all about participation. If the S&P 500 index is transferring larger, what about all of the shares that make up these indexes? Towards the tip of a bullish section, you’ll typically see the foremost indices transfer larger, however measures of breadth like this one will begin to slope decrease. This means a weakening of market internals and fewer upside momentum behind the worth actions.
You may discover on the chart that this breadth indicator peaked in June and, from there, it has been extra sideways than bullish. This reveals what number of particular person shares, significantly in cyclical sectors, haven’t been taking part in the newest strikes larger.
Subsequent now we have what I name the “offense vs. protection ratio” which compares the equal-weighted Client Discretionary and Client Staples ETFs. I am utilizing the equal-weighted ETFs as an alternative of the extra widespread cap-weighted variations to restrict the affect of the mega-cap Client Discretionary shares: AMZN, TSLA and HD.
This ratio made a brand new into December, which was one of many foremost inputs that inspired me to stay general constructive on shares by means of the November excessive. During the last six weeks, nonetheless, this ratio has turned decrease as shares like PG, KO, PEP and others have made new all-time highs. This means a transfer to extra defensive positioning going into the brand new yr.
The following line (purple) reveals the relative efficiency of the S&P 500 ETF vs. the Utilities sector (XLU). I’ve discovered that buyers often solely personal Utilities in the event that they wish to journey out market uncertainty by proudly owning one thing with low volatility and excessive earnings. General, this ratio has moved larger by means of the course of 2021, which illustrates the underperformance of a key defensive sector. Just like the patron ratio above, this has additionally taken a destructive flip in December and may very well be a key chart to look at going into January.
Lastly, we’re wanting on the new highs and lows for the S&P 500. A wholesome bull market section is marked by an growth in new highs. The market is doing properly if it is not simply the foremost indexes making new highs, however a broad group of shares exhibiting power as properly. Whereas this indicator was pretty robust in October and November, I’ve seen much less and fewer shares making new 52-week highs in December. A bullish development in early 2022 would actually should be confirmed by a rise in new 52-week highs.
General, The Chart reveals the general power of breadth measures by means of a lot of 2021, but in addition reveals the power of the FAANG commerce over the summer season. As sectors like Power and Financials topped out in Might, the market moved larger regardless of the shortage of participation.
Lesson #4: Buyers haven’t broadly rotated to defensive positioning but, however they’ll!
For our fifth and closing chart, now we have the Ten-12 months Treasury Yield, together with the relative efficiency of Financials vs. Expertise.
What strikes me on this chart is that the Ten-12 months yield is sort of precisely the place it was in February! Now, it has not been a sideways development over the past ten months, as this key rate of interest has fluctuated as much as 1.75%, right down to 1.15% and again once more. However the important thing to this chart is what it tells us about market management.
From January to Might, it was all in regards to the cyclical sectors driving the markets larger. Sectors like Power and Financials emerged in This fall 2020 and pounded larger within the first quarter. Might to August noticed rates of interest transfer decrease, which implies a headwind to these value-oriented sectors and extra of a tailwind to progress sectors like Expertise. The ratio moved larger into October as charges moved again larger and worth sectors shined. The final eight weeks have been marked by decrease rates of interest and stronger charts in Expertise. Progress sectors have as soon as once more regained the management function.
I used to be requested not too long ago the query I posed originally of this text. I answered “rotational” and I really feel this fifth chart tells the story fairly clearly.
If you wish to perceive the management theme in equities, and determine on which facet of the expansion/worth debate you ought to be positioned, I might watch the chart of the Ten-12 months. Given the Fed’s well-documented plans to boost charges in 2022, I might count on this chart to maneuver larger, which might imply it is more likely we’ll see a sector like Financials outperforming Expertise. And this chart ought to provide help to perceive the timing of that transfer.
Lesson #5: Rates of interest matter. Massive time.
How would you describe your expertise as an investor in 2021? And what are you able to do right now that can assist you improve your funding course of and discover success in 2022?
That will help you reply these questions, try the video model of this text, which features a extra full illustration of the teachings from every of my Prime 5 Charts of 2021!
RR#6,
Dave
P.S. Able to improve your funding course of? Take a look at my free course on behavioral investing!
David Keller, CMT
Chief Market Strategist
StockCharts.com
Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your personal private and monetary state of affairs, or with out consulting a monetary skilled.
The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer, and don’t in any approach symbolize the views or opinions of some other particular person or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps buyers decrease behavioral biases by means of technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor resolution making in his weblog, The Conscious Investor.
David can be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency targeted on managing threat by means of market consciousness. He combines the strengths of technical evaluation, behavioral finance, and knowledge visualization to determine funding alternatives and enrich relationships between advisors and shoppers.
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