Stop Wasting Your Time on New Year’s Stock Predictions

January 4, 2022  |  Michael Reilly

Nobody, and I mean nobody, can tell you with any amount of certainty what is going to happen over the next 12 months.

Yet, with the change in the calendar from December to January of a new year, we see the same lame headlines predicting this year’s winners… “Stock Outlook for 2022” or “Predictions for ‘22.”

Seriously, just stop reading this stuff. I mean it – your time is valuable, use it wisely.

Spend more time thinking about what’s in front of us now… spend your time considering what is happening, over what might happen later.

Want my 2022 prediction?

Some stocks are going to go up, some stocks are going to go down and other stocks will churn sideways.

And I bet come December of ‘22 that’s exactly what you’ll see.

Ok, now that we’ve dismissed the value, or lack thereof, in spending any of your precious time reading the year’s next winner list, let’s find something more productive to do.

As many of you know, here at Rowe Wealth Management we use technical analysis as the basis for investment decisions.

Technical analysis is the study of price behavior. And what we know for sure is that prices trend.

That’s a fact – it’s why technical analysis works.

We want to find trending markets and invest in them.

Our approach analyzes markets in the short- to intermediate-term time frame… which means weeks to months – and no further out than that.

Markets are much too fluid to say in January what to expect 12 months down the road. It’s a waste of time.

How about we worry about the next quarter? And then the next quarter after that, and then the next after that.

And before you know it, you’ve analyzed an entire year in real-time.

That makes a lot more sense to me. Why pretend we have any idea of what will be happening a year from now?

Focus on what is in front of you now don’t worry about what might happen 6-12 months from now. Too much can change.

Since this is your first installment of ADAPT Weekly in 2022, let’s make it productive and look at some price charts that will help illustrate the current investment landscape and by doing so, help you get off to a good start this year.

Believe it or not, with all the doom and gloom headlines about the latest iteration of covid and the potential implications, not all is lost.

True, 2021 was not an easy year to navigate financial markets and there were plenty of headwinds.

But in spite of challenges and headlines to the contrary, we’re seeing lots of all-time highs at both the index and sector levels.

Here’s a monthly chart of the S&P 500 index hitting new all-time highs.

And here is a relative strength chart comparing stocks to bonds. I love these kinds of charts. This relationship exemplifies risk-on vs. risk-off.

Do you see how in spite of all the fears over the resurgence of COVID, stocks are still stronger than bonds on a relative basis?

Stocks are showing both relative outperformance and absolute performance, as the S&P 500 hits new all-time highs.

And check this out… look at growth via the S&P 500 vs. defensive asset classes, Gold, and U.S. Treasuries.

If stocks were really about to roll over, the relationship between these three assets would look very different.

This next chart looks at the Dow Jones Industrial Average and the Dow Transports both reaching new all-time monthly highs.

For all of you Dow Theorists out there, this is a jackpot, as the Transports are confirming the highs in the Industrials.

We’re seeing new all-time highs on the sector level as well.

Consumer Discretionaries are making new monthly closing highs and Technology is currently ranked as the strongest sector of the 11 broad sectors we track – also hitting new monthly closing highs.

Not only that, but Healthcare and Consumer Staples are also joining the party with new all-time monthly highs.

So does this mean the moon and stars are all aligned for investors? Not necessarily. Just look at Small-Caps in the same quagmire they’ve been stuck in since February 2021.

And the Value Line Geometric Index is looking a lot like small-caps, trading sideways for the past year.

I like to look at the VLG because it represents the median stock – the average joe stock. We’d like to see both Small-Caps and VLG breakout supporting the case for a strong equity market.

Now let’s talk about sentiment for just a minute. Sentiment data is most useful when it’s at extremes – either overly bullish or overly bearish.

Coming into 2020 and even 2021, there was a lot of optimism in the markets.

We’re just not seeing that same level of optimism now. People today aren’t feeling good about the economy.

Historically when sentiment was at these low levels, they turned out to be good buying opportunities for stocks.

We wrote about this last summer when we believed the amount of optimism and bullishness was becoming a headwind for stocks.

Today, we don’t have that problem at all. If history is any gauge, sentiment readings could act as a tailwind for stocks, as more investors become more bullish and begin the next buying cycle, driving stock prices higher.

Now, is any of this a guarantee? No, of course not.

However, if we’re going to summarize what we’re currently seeing out of stocks, we have indexes and sectors breaking out to new all-time highs. Defensive asset classes are weak relative to stocks, indicating a risk-on market environment, and sentiment data is telling us there are potential buyers out there waiting to put fresh money to work.

This is what we can see happening today… now does this tell us what to do in June?

No, but it does provide evidence of uptrends in stocks. And that will have to be enough for now.

Rowe Wealth can help you tackle 2022 without a single worry about which way the market is heading – just give us a call. You can schedule a free 1-hour consultation to review your portfolio with me and determine your risk score here.

Until next week, invest wisely, friends.

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