Welcome to 2022. The ES closed out 2021 breaking out to a new ATH coming just shy of 4800 for the first time last Monday only to spend the remainder of the low volume holiday week trading in a tight range above the 4750 breakout point.
Going into the new year inflation will likely remain the strongest driver of the news cycle. Omicron appears to be mild, but it is still causing governments around the world to continue restrictions and force disruptions to the supply chains ect. This fact coupled with a world still hungry for products will continue to increase inflation pressures. So that narrative is still all about the Fed and whether or not Powell can continue to thread the needle of tightening policy, but gently enough to keep the market happy.
Typically new money flows into the market at the beginning of the month/year and tax loss selling is finished so the market may get a lift from that. The question however is where the new money will flow to. Towards the end of the year small cap tech and growth names continued to be hammered and the mega caps continued to dominate as well as dividend paying stocks. Many of the stalwart dividend payers closed the year near 52 week highs. Names such as KO, MCD, PG, WM ect. all made momentum stock type moves into year end. I would expect this trend to continue until the inflation narrative changes.
Regarding the ES/SPY specially. The ES remains the strongest index as large caps continue to dominate. Price often retests a breakout point one or more times before continuing higher so I would not be surprised to see a pull back into the 4750/4700 zone. To the upside price must clear the 1.13/1.27 fib extensions before continuing higher. My 7MESH system uses the 1.13/1.27 fibs as the first targets on breakouts. It also uses the levels as a zone to watch for failed breakouts. My back tests show that the probability for price continuation goes up significantly above the 1.27 fib extension. The next target level (1.618fib) sits at 4901. If price manages to get this high the next obvious target would be the phycological round number of 5000. If price falls back below the breakout point look for the top of the neutral to provide first support.
Themes to watch for 2022
OIL/RESOURCE sectors reaction to supply demand constraints
Interest rates
Rotation from mega caps back to growth
Continued strength in defensive plays like dividend stocks
Build Back Better
Labour pressures (ie no one wants to work a regulart job anymore)
US/CHINA/RUSSIA tensions
Social Unrest
Weekly events
Tuesday... US Manufacturing PMI
Wednesday... Crude inventories & FOMC minutes
Thursday...US ISM Non-Manufacturing PMI, Initial jobless claims & Factory orders
Friday... Unemployment rate & Non-Farm Payroll.
Bullish notes:
Santa rally continues
Beginning of the year/month inflows
Strong TSLA delivery #'s may boost NAS/ES
Bearish Notes:
Still massive covid #'s getting reported
Inflation is still a thing
Market running out of upside catalysts
Market continues to price in tapering/interest rate hikes
