Year 2022 US stock market preview
As promised the first most important article for the preview of 2022 US stock market is here. 2022 is a Mid-term election year, where greater than normal volatility is almost certainly guaranteed.
Fundstrat Tom Lee has predicted previous year with great precision ( S&P500 4800 closing for year 2021 ), we will watch out his commentaries for the year 2022 prediction ( and his update through out the year ). Because I believe there are a lot gold nugget in the video. ( Year end target is not the most important number here, but watch what he said about things that could happen during the year 2022 )
1st half of the year we could be worried
-supply chain disruption
-inflation
-Fed rate hike uncertainty …etc.
- overweight large cap and defensive
and most importantly
Gain will be concentrated in 2nd half of the year
pay attention the last bolded point, that is the most important takeaway
Pay zero attention to the media given factors affecting market, because most of them is not going to be relevant, seasonality predicts market movement and news cycle. Market moves, narratives follow. ( They will tell you various half-truth and nonsensical reasons, US dollar getting stronger, yield flattening, china slowdown, Europe slowdown , high energy cost…etc. just ignore them and focus on what the chart is telling you )
We will conduct our studies by looking at previous mid-term year back to year 1982. First let us look at general idea /picture of a mid term year as follows,
Typical midterm seasonality chart
Mid-term election year typically does poorly from end April – early May to end September. Which sort of coincides with what tom Lee mentioned in the videos shown above. Therefore maximum caution is warranted in Q2 -Q3 of the year, regardless of whether 2022 is a bullish/bearish year for S&P 500. Do take note that the the line shows the tendency of going up/down, but it’s doesn’t show the magnitude, worse still, seasonality pattern could fail, as you will see in previous year examples that I will be showing.
Now let us go through all the previous mid term year from 1982 to 2018 ( reverse chronologically )
Year 2018
Is that a roller coaster track ? Reader would be forgiven if they mistaken it for a roller coaster track, because this chart actually resembles more like a roller coaster track than a stock chart, reader would puke just by looking at the chart and imagining the ride in their head. Year 2018 is an extremely volatile bear market. There are 6 gyrations with peak to trough ranging from 6 – 17%. The lower low was violated by the big drop in December 2018.
Year 2014
Year 2014 is among best scenario you can get for a Mid-term election year , for the following reasons,
1) S&P 500 are mostly within the ascending channel band
2) Even in the worst 10% correction scenario
3) this 10% correction period also started on mid/end September, traditionally the expected unfavorable part of the year.
4) previous year lower low was not violated
Year 2010
Year 2010 is quite decent and relatively easy to navigate, as long as you stick to the seasonal playscript,
- Exiting by mid April and re-enter around October or November as a trader ( or trade less , in the most nimble manner )
- Accumulate more shares/index ETF during the seasonally weak period ( May to Sep/Oct ) as an investor
While the violation of previous year 2009 low was borderline, can be argue in both cases, but I am going to rule it as not violated )
Year 2006
S&P 500 started out the year by chopping around slightly upward slanting channel ( you can also argue that’s a horizontal channel ) till early May. And then correct by 8% to mid July, and rally subsequently till year end.
Year 2002
This is last and final year of the dot com bubble burst aftermath, market go down from January till mid October, and rally strongly till 2003 from mid October bottom. Needless to say, previous year lower low was breached by a significant margin.
Year 1998
Year 1998 looks scary if you focus on the 22% correction from mid July to early October ( due to Asian Financial crisis ), but there are plenty of good news as well
-Previous year lower low not violated
-stick to the usual seasonal playscript,
- Exit US index trade by mid April and re-enter around October or November as a Trader( or trade less , in the most nimble manner )
- Accumulate more shares/index ETF during the seasonally weak period ( May to Sep/Oct ) as an investor
If you buy at the low point, you will be sitting comfortably on a huge gain for the next 2 years till dotcom bubble burst.
Year 1994
Year 1994 is another scary roller coater ride that look similar to 2018, it’s the year of Bond market crisis. Previous year lower low was violated numerous times, the gyrations is not for the faint hearted and is almost impossible to navigate even for the nimblest trader.
Year 1990
Year 1990 is a also another scary roller coaster ride, it’s a recession year, due to savings and loans crisis. the biggest correction happens at 20% from Mid July to end October period. Note : previous year lower low violated.
Year 1986
Year 1986 had a lot of chop in the middle part of the year, even though it stays above 1985 year, and not violating lower low from previous year
Good news ?
-Lower low not visited, investors and traders can sleep comfortably at night.
-the volatile period happens around the seasonally weak part of the year, so can stick to the seasonal playscript.
Bad news ?
-nothings much unless you overtrade during the seasonally weak period ( April/May – October )
Year 1982
Year 1982 begins by being stuck in the mire of market down trend from 1981, most stay below the downtrend line until getting out of it by end august period. ( note : previous year lower low violated )
I have summarize in the table as follows,
After looking at the 10 previous mid-term year, we have about 5 cases out of 10 cases where previous year lower low was violated ( year 2018, 2002, 1994, 1990 1982 ), about 50% of the time, previous year lower low is breached.
So in the coming year, we shall see if 2021 1st lower low at 4495 and 2nd lower low of 4279 will be breached, because that could signify a more serious correction.
Would TINA/FOMO flow save the day in the coming year? It’s anybody’s guess, they were strong in December, not sure if they could help in the coming, but Fundtsrat Tom Lee seems to think TINA is guaranteed
Ok, enough of story telling, just tell me what to do , will ya ?
Action plan for Investors and traders,
Investing : Since it’s a for long term holding period, the seasonally weak period in May – October represent an excellent period to accumulate index etf / shares ( quality companies or mega cap) at various market low point. If the chart is just too ugly/uncomfortable for you, just stop reading the news or watch the media, but persist in buying and accumulating.
Trading : stay out of US index market from mid-end April/, or latest by early may depending on the market movement ( literally sell in May and go away ) and look for signs of bottom in October or earlier depending on the chart ( focus on the damn chart )
The key quality to endure this period is nothing but patient, don’t try to pick bottom, that’s the surest way to self destruction and blown up of account, wait for bottom to finally be confirmed before entering, usually after market bottom, the chart at the 15 mins time frame will look similar to something like below,
chart is going up in staircase manner in the 15 minutes chart. At the higher time frame, it’s a big reversal bar, possibly covering entire previous bearish bar. or just look for O’Neil follow through day** /other bottom reversal formation at key level in the daily chart.
**O’Neil follow-through day definition
https://education.investors.com/financial-dictionary/general/follow--through-day-concept
In the coming days, I will post another mid term review of Nasdaq chart from year 1982 to year 2018.
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