What January Means for the Rest of 2022

February 1, 2022  |  Michael Reilly

Rather than guess at what might be happening in Global markets, let’s focus on what is happening – and ADAPT our portfolios accordingly. 

So, what do we know for sure today? 

We know January is in the books and it will go down as one of the more volatile beginnings to a year in recent memory.

We know that bond yields are rising and central banks are tightening… 

The Fed continues to chase inflation, but at least at this point they realize it’s not transitory – better late than never, I guess.

Rates, in general, have been moving higher, not just in the U.S., but around the world.

Although U.S. bond yields are off their recent highs, they remain above the important 1.75% level.

Globally, yields around the world are breaking out. German 10-year yields are trying to break above resistance at zero (yes, zero) and back into positive territory for the first time since 2019. 

While Japanese 10-year yields are at their highest in over six years.

“So why should I care about rates?” you ask…

Because even if you don’t invest in the bond market, the biggest institutions in the world do, so it makes sense to know what they’re up to.

Individual investors should keep an eye on the direction of bond yields because rising yields mean we need to close our playbook that worked in 2019 and 2020, and dust off the playbook called What Works in a Rising Interest Rate Environment.

In the face of January’s volatility, we’re seeing the stocks that tend to do best in rising rate environments leading the market. 

The two best sectors when rates are rising are Energy and Financials.

And as it turns out, those were the only two sectors up in January – Energy (XLE) and Financials (XLF). 

So, as messy as January was, from a sector rotation perspective, markets are doing exactly what we’d expect.

Assuming rates don’t break down, we should ask ourselves, “how could investors take advantage of the rising rate environment?”

You could always look at the broad-based sector funds outlined above, or you could dig a little deeper into the industry group level and take a look at Oil Explorers and Producers. 

Take a look at the Invesco Energy and Explorers ETF (PXE). Or rather than the broad sector, take a look at Regional Banks – the iShares Regional Banks ETF (IAT) or the SPDR Regional Bank ETF (KRE) are worth a look… all three of these have shown both relative and absolute performance relative to the broader market (SPX) this year.

If individual stocks are your thing, take a look at Chevron (CVX). We like companies that show relative strength. And Chevron is an example of a company showing both relative and absolute outperformance. 

As you can see in the long-term chart above, CVX is soaring to new all-time highs as it breaks above resistance at its old high from 2014 and 2018. 

If this is a valid breakout, we’d expect a rally to follow this seven-year base breakout.

Here’s a close-up of Chevron using Fibonacci to outline levels of support/resistance and future interest.

A break below the 127 area would likely mean Chevron isn’t ready to break out just yet and could mean the price falls back to its previous range – something to be aware of from a risk-management point. If Chevron can stay above the 127 level, there’s potential upside all the way up to the 173 range.

I want to throw out this little caveat to our readers, ADAPT Weekly isn’t just about stock picks, it’s about reading the markets via Relative Strength. 

I’m simply using Chevron as an example of how applying Relative Strength to markets allows us to drill down to sector strength, industry group strength… all the way down to the strongest individual securities. 

It just so happens that Chevron is a good example of our process at work…

HOWEVER, and there’s always a however, everything I’ve outlined above regarding the strength out of Energy, Financials, or even Chevron, is based on the current rising interest rate environment staying firmly intact…

If it doesn’t, all bets are off and the revised market environment will call for a different playbook.

So please check back as we outline any new developments…

And until then, invest wisely.

P.S. Rowe Wealth can help you tackle the volatile markets without a single worry about which way it’s heading – just give us a call. You can schedule a free 1-hour consultation to review your portfolio and determine your risk score here.

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