Winning Trades for Q1 ‘22

Hey There Income Hunters, 

 

The great thing about turning the page to a new year is it can fuel a psychological shift in forecasts.

 

I am pretty defensive going into 2022 and I don’t think the market has come to that view yet.

 

The Fed coming into the year with an accelerated QE taper policy is a huge headwind to overcome. What I think the market is missing is the fact that tightening has a very similar impact as rate hikes.

 

Think about all the wealth destruction we have already seen in many sectors:

 

      • Meme stocks off as much at 60%
      • ARK Fund names down 70%
      • SPDR S&P Biotech ETF (Ticker: XBI) down 36%
      • Invesco Solar ETF (Ticker: Tan) down 42%
      • Crypto down 35%

 

Now, two other things to consider is that the high inflation in 2021 accounts for 1.5% of tightening because of the tax it inflicts on consumers.

 

Plus, after two years of $6 trillion-plus in deficit spending, we are now going into a year where monetary policy and fiscal policy are tightening.

 

Let’s take a look at more new year money flows and the winning trades for Q1.

 

Where Will New Money Flow to Support the Market Come From?

 

The past 3-years the market has had three levels of support:

 

      1. The Fed was the most stimulative it has been in 100 years
      2. The US government provided an incredible spending tail wind ($6 trillion)
      3. The vaccines provided a ton of hope for a return to a normal real economy

 

Today, the market is looking at $2-$3 trillion of monetary and fiscal withdrawal. When we add inflation to the picture, the market is faced with a tremendous amount of tightening in 2022.

 

Consumers are already showing signs of weakening as you can see from the Fed’s consumer sentiment index, including new lows since COVID hit. 

 

The Fed has no choice but to go through with tapering. So no matter what,  a top strategy for 2022 has to start off with selling growth stocks

 

I think we will see a deep correction in QQQs until the Fed backs away from tightening. The flip side to that coin is the Fed won’t back away from tightening until they get at least a 10% drop in the broad indices. 

 

This is an environment in which value stocks are going to outperform growth significantly. 

 

I am working on paired strategies in areas like communications, REITs, healthcare and semiconductors that feature diverging trends within the same sector.

 

2022 will be a year during which you may even want to hold more shorts in your portfolio than longs. 

 

That will be a tough adjustment for investors to make. 

 

S&P 500 Back in Extreme Overbought Territory 

 

The illustration below shows how overbought the S&P is to close out the year. 

 

Extreme overbought means it is 2+ standard deviation above the 50 DMA.

 

So, 2022 will begin with the S&P 500 stretched on both a valuation and short-term momentum basis. 

 

Remember, the Fed’s balance sheet is still growing by $90 billion a month. On Jan. 15, that number will fall to $60 billion

 

Q4 S&P Earnings

In the fourth quarter, 57 S&P 500 companies issued negative EPS guidance, and 38 S&P 500 companies issued positive EPS guidance. 

 

The estimated earnings growth rate for the S&P 500 is 21.3%. If 21.3% is the actual growth rate for the quarter, it will mark the fourth straight quarter of earnings growth above 20%. 

 

Now think of a $1.5T to $2.5T fiscal and monetary tightening in 2022.

 

Bring It Home

I wish everyone who is part of the Option Pit community all the best 2022 and beyond.

 

I’m looking forward to another year of staying ahead of the market and making major profits along the way. 

 

Live and Trade With Passion My Friends,

 

Griff

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