MARKet Forecast 2022

Hey Traders,

Happy New Year!

2021 is officially over, and we have the vast expanse of a new year stretching ahead of us …

Exciting, right?

This year is sure to pack a lot of twists and turns (lucky us, right?) …

But with every new obstacle comes new opportunities … especially for us traders!

Here’s a look at what I’ll be watching in the year ahead.

The Fall of the Tech Titans

First and foremost … I think it will be a tough year for tech stocks.

Now … I am not calling for a collapse of the FAANG names. Not by a longshot.

But I do think that the long, strong tailwinds that have boosted tech names to all-time-high after all-time high (while much of the rest of the market floundered, I might add) will be fading away.

Why?

First and foremost, we’re looking at inflation and interest rate hikes … which tech stocks HATE.

Why?

Because many tech stocks are considered “high growth” stocks. That means their value is based on their future potential, rather than their current performance.

Remember how it took years for Amazon (Ticker: AMZN) and Tesla (Ticker: TSLA) to actually start making profit, but their share prices were soaring anyway? Yeah, like that.

These high growth stocks are valued based on estimates about their future earnings, and as interest rates and inflation rise, those “future earnings” are slowly eroded in value.

Plus, high growth stocks often need loans, and higher interest rates on loans are obviously not ideal, because you’re paying more to borrow money. And as interest rates rise, the value of high growth companies’ debt also rises.

That’s not exactly an asset for a company whose value depends on their valuation … any extra debt will work against them.

Not only that, but as interest rates rise, consumers will pull their money out of high risk stocks in favor of low-risk investments with guaranteed returns.

You can read more about why tech stocks hate interest rate hikes right here, but that sums up the main points.

That’s not the only thing working against tech.

We will also see “stay at home” trades fade into the background, while “reopening” trades come back in vogue. 

This may not create too much of a problem for every tech name, but for those who have enjoyed a surge of pandemic-related interest, they may see their COVID strength come to an end.

As a result, I think tech-heavy indexes will face stiff headwinds in the year ahead.

I’m looking at the Nasdaq-100 (Ticker: NDX) and Invesco QQQ Trust (Ticker: QQQ) to underperform.

Energized Industrials

But it’s not all doom and gloom!

I have high hopes for industrials, and the Dow Jones Industrial Average. 

I think the SPDR Dow Jones Industrial Average (Ticker: DIA) will be the best performing index of 2022.

Industrials like aluminum, copper, and oil tend to do well in inflationary environments. After all, while you may be able to forgo buying a new Peloton (Ticker: PTON), you can’t stop buying essentials, like gas for your car, or heat for your home. And the industrials will simply pass on the higher prices to consumers rather than taking an inflation-based hit (because they don’t need to).

Three names I have my eye on in particular are …

Alcoa (Ticker: AA): The aluminum stock has been on a hot streak this month. Aluminum prices have been bolstered by inflation concerns (after the recent 9.6% Producer Price Index increase), lowered output coming from China, and a potential increase in demand from electric vehicle makers.

The stock was already trending higher throughout much of 2021, but with industry-wide tailwinds at its back, AA could be set to soar even further in the year ahead.

In AA’s pits, call open interest just edges out puts, with 1.2 calls open for each put. AA’s top six open interest positions are in the standard January expiration, and of those six contracts, five are calls. The top open interest actually lies in the January 55-strike calls, with over 21,000 contracts open. With AA closing at $59.21 on Friday, this contract is currently solidly in-the-money.

Freeport-McMoRan (Ticker: FCX): FCX shares have also been moving higher this month, although their current $41.73 is still off their annual high of $45.91 touched in May.

In spite of the turbulence the stock has seen this year, as a copper miner, I think FCX is set to take off in the year ahead.

Like AA, FCX is not only boosted by the current inflationary environment, but there will likely be a huge demand for copper in the coming electric vehicle craze, placing this copper miner in a very good position to run higher.

In the pits, traders are a bit more split on this stock. Open interest for calls to puts is about one-to-one, with puts edging out calls just slightly. The top open interest contracts are the January 40-strike call and the 30-strike put, both with about 57,000 contracts open.

Exxon Mobil (Ticker: XOM): Like I mentioned earlier, oil and energy stocks are set to thrive in inflationary environments. While XOM has been slowly trending lower in recent weeks, closing at $61.19 on Friday, continuing demand for oil, as well as potential oil supply issues, could boost XOM higher. The oil giant also signalled it will report a profit for the fourth quarter in a row during their next trip to the earnings confessional.

The pits seem bullish on XOM, with calls outnumbering puts 1.2-to-1. The January 65-strike call currently holds the top open interest, and if XOM can reclaim, or exceed, its November high of $65.65 within the next three weeks, there might be some very happy traders in XOM’s pits.

Also of note … 30-day implied volatility (IV) is close to the very bottom of its range, making XOM options especially cheap right now …

Just saying!

Your Only Option,

Mark Sebastian

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