Last year in 2021, S&P 500 (SPX) gained 26.9% on the year, just less than 1% away from all-time high. It is the best performing index that beats Nasdaq Composite (IXIC), Dow Jones (DJI) and Russell 2000 (RUT).
Despite the outstanding performance last year, there are a few important events unfolding in 2022 where I have covered one of them – potential effect of macro environment on S&P 500. Next is the 4-years US election cycle.
Cycle Analysis for S&P 500 During US Midterm Election
US election has been an important catalyst for the stock market. Take a look at the annual seasonality chart for S&P 500 during the US midterm election cycle for the past 71 years below:
It is obvious that S&P 500 is in a trading range with increasing volatility to both sides. A pullback starts in January, April to September are the worst months for S&P 500 while the last 3 months are the best in terms of the performance. In short, S&P 500 is very choppy for the first 9 months and one might find the bull momentum is gaining traction only in early November.
The rationale behind the performance of S&P 500 during US midterm election cycle based on the seasonality chart is likely due to the implementation of the unpopular measures to curb the ever-increasing deficit of the government, tightening of the monetary policy with rate hike and tapering of the liquidity that are starting in January 2022.
Should 2022 behave similar to the history of the US midterm election, it will be a challenging year for the stock market when the volatility affects the stock price in both directions.
Trading Tactics for Volatile Trading Range
In a bifurcated market where S&P 500 is mainly in a trading range, the trading tactic is required to be adopted to suit the trading environment, such as to long the outperformers during the up-swing of S&P 500 and to short the laggards during the down-swing of S&P 500.
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In case you are wondering if shorting is risky especially when the S&P 500 is near all-time high, refer to the post on how the market breadth behaves before a stock market crash, where you will discover many stocks outside of S&P 500 (especially the small cap stocks) hit new 52 weeks low since November 2021.
The key is to be nimble and to adjust the trading timeframe in order to beat the market in 2022 because a buy-and-hold or buy-on-dip strategy, which is typically a great strategy for up trending market environment, might not work well in a choppy and volatile trading range.
Unless you are a long-term investor who are willing to hold quality stocks such as buying Apple stock for years and not to be bothered by the volatility within a year or two, you are better reassess your current trading tactics in order to outperform the SPX in 2022 as the macro environment, midterm election cycle and the market breadth all point to a challenging market environment in 2022.