What the Year of the Tiger Will Bring for the Asian Markets – A Conversation with Finalto’s Alex Yap

From a major rebranding exercise to upheavals in the Asian markets throughout the year, it was busy 2021 for Finalto. Who would know better about this than Alex Yap, Head of Institutional Sales for Asia at Finalto? Today, we are in conversation with Alex about how last year treated the leading fintech company and what his expectations are for 2022, the Chinese Year of the Tiger.

How has 2021 treated you and Finalto?

In general, we’ve done pretty well this year, despite the spread of the Delta variant during the first half of 2021. Without the luxury of travelling and meeting clients face-to-face, we’ve had to adapt quickly to new ways to connect with our clients. Our strong customer relationships and Finalto’s branding helped us grow even during this difficult year. I think it has been a good test for all of us, teaching us to respond to changes with agility and innovation. At this point, we’re more equipped than ever to continue on our growth path.

A lot of business in Asia is done face to face, how has this changed during these times?

Yes, Asia is known for its love of in-person conversations, which meant that we used to travel extensively. But now we and our clients have had to adapt to the new normal, relying on online interactions. Even simple Zoom calls have helped us stay in touch with our clients. It has only been thanks to tech innovations that we were able to effortlessly continue our services.

When the pandemic began in 2020, a lot of our clients were not initially comfortable with a completely digital approach. But people are resilient, and they have become much more comfortable over time with the new way of communicating, which is completely online. I can safely say that the pandemic has transformed the industry in Asia.

The Asian markets went through a lot last year, with the raging Delta variant in the first half and the energy crisis in China in the second. What’s your take on the Asian markets in 2021?

Yes, it was an eventful and extremely busy year for us. The Delta variant brought massive volatility back to the financial markets. But after the volatility of 2020, the markets adjusted quickly and settled down much faster in 2021. In fact, there were several months of low volatility last year, unlike in 2020. Even the news of the Omicron variant led to only a couple of weeks of higher volatility, after which the markets seem to have taken this fresh spread of Covid-19 in its stride. On the whole, volatility was lower than in 2020 and did not last as long. The markets adapted quickly.

Again, if you see the downgrade of the Asian markets by the IMF, it was much better than in 2020. They cut their outlook for Asia by about 1% to 6.5% in October. With economies reopening, demand grew but supply constraints continued, with OPEC deciding to continue with its production restrictions. As a result contracts for natural gas for November delivery rose to $6.466/MMBtu on October 5, the highest since December 2008. Natural gas prices in Europe rose fivefold, while in Asia, they were up 1.5 times. WTI rose to $80/bbl by the end of the first week of October, its highest since November 2014, while Brent was at its highest since 2018.

Global energy prices have normalised since then and had little to do with the energy crisis in China. China is aiming at becoming carbon neutral by 2060 and has set a challenging carbon dioxide emissions peak target to be met by 2030. The nation has been investing significantly in renewable energy. Plus, it has immense nuclear power capabilities. However, although it is the world’s third-largest user of nuclear power, this energy source accounts for only 5% of its energy mix as of 2020. Compare this to the 70% in France. So, the energy crisis can be averted by raising nuclear power consumption.

Where does Finalto see itself in the financial markets of the Asia-Pacific region?

Asia is a very diverse market. Not only does the level of sophistication differ from country to country, the needs and preferences also vary significantly. But, Finalto is a very strong brand, with a revolutionary 360 suite or what we like to call a “solution in a box.” It is highly customisable, offering multi-asset capabilities to our clients. Despite our marketing not being too aggressive last year, we were able to garner clients through our flexible pay-as-you-go subscription model, with customised pricing and product delivery.

This is a solution we have tailored specifically to offer powerful features, that our clients in Asia have yet to fully discover. So, for 2022, it is key for us to communicate the advantages we offer. This includes a complete end-to-end platform, with front-end and back-office administration capabilities, robust trading and pricing tools and cutting-edge connectivity. With our pay-as-you-go model, clients can either choose the full suite or select from individual components to enhance their current capabilities.

For instance, ClearVision is a leading tech solution for institutional investors worldwide and is gaining popularity among proprietary trading firms and brokers focused on global growth. Its various components include the ClearPro trading platform for professional traders, the ClearWeb cloud-based trading platform, the ClearMobile mobile trading platform and FIX Connectivity for custom needs.

How are the needs of fintech firms and traders in Asia different from the other regions where you offer your services?

As I mentioned before, this is a very diversified market. The level of tech sophistication in the region ranges from novice to very advanced levels. So, Finalto 360 is the ideal tool to cater to such diverse needs. Fintech is still in its nascent stages in many parts of Asia and the sector is still trying to establish a strong footing.

Then we have the huge cultural and language differences. To serve clients from Singapore as efficiently as those from Thailand or Indonesia, we need to provide localised services. With a pan-Asian team, we understand the way they run their business across these different nations and what they need. We can offer services and support in the language they prefer through Finalto 360. This is where we have an edge in the market.

With Finalto 360, we offer our clients a turnkey trading system based on a set of 5 cutting-edge modules developed by highly experienced industry experts, which offers complete support and scales with the client’s business.

What are your predictions for the Asian financial markets for 2022?

The markets across Asia will see economic recovery through 2022, although the pace will differ across nations. South Asia is expected to grow at the fastest rate in the region, with East Asia coming in a close second. This could be due to the regulatory reset in China, which could impact the 2022 GDP.

The Hang Seng contracted about 17% in 2021, while most key indices in Asia saw positive growth. In fact, it is the only one that has been on a downward spiral through last year, reaching a low of 23,192.63 on December 17. But I won’t be surprised if it bounces back strongly in 2022, so investors should keep a close watch.

The People’s Bank of China is unlikely to revise its interest rate policy anytime soon. On the other hand, it set a significantly weaker-than-expected midpoint for the yuan exchange rate in early December. The central bank indicated that this was in response to the high levels of foreign exchange reserves. This move could lead to greater liquidity in the economy, which will need to find outlets. In which case, we might see more interest in the stock markets from investors, especially true of Hong Kong, which is a key financial centre in the region.

On the other hand, inflation is likely to continue to be a key challenge in Asia in 2022. With the economies in recovery mode, demand could well outstrip supply, which will drive inflation up. And this is against the backdrop of supply chain disruptions.

Central banks, including the US Fed, are unlikely to moderate their policy tightening any time soon, which will also put pressure on assets. Central banks in Asia will, therefore, be keeping their eye on the Fed. Core prices have remained fairly flat so far, but this could change depending on how the interest rates are revised. In fact, if the Fed makes a drastic shift in its stance, we could see a rise in volatility in the financial markets.

Given the current inflation scenario in the US, I believe the FOMC could decide to make 2, 3 or even 4 rate hikes through 2022. We are likely to see some hikes very soon and I won’t be surprised if we see larger than expected rise. So, investors should also keep an eye on the Fed’s decisions, since it would affect markets globally.

Gold Has Gained Value During 4 of the Last 5 Weeks

Gold daily chart

Gold continues to trade in a range-bound manner, but over the last five weeks, gold prices have gained value during four of those weeks. Although gold has traded lower yesterday and today, ending the week with a moderate gain of 0.6%. For the most part, we have seen gold trade through the eyes of the weekly chart with a succession of higher lows. What has been lacking is a series of higher highs based upon the high achieved in June 2022 when gold topped out at $1920.

KGX Index

U.S. equities had mild to moderate gains, with both the Standard & Poor’s 500 and the NASDAQ composite closing higher on the day. However, the Dow Jones industrial average did close lower by 0.56%.

For the most part, market participants and analysts have factored in a much more aggressive Federal Reserve with the anticipation of three or four interest rate hikes this year. The current assumption based on information released from the Federal Reserve is that each rate hike will be ¼%. That means that if they move forward with this more aggressive monetary policy, they will raise rates only 1% this entire year which would take the Fed fund rate from its current fix of zero to ¼%. This means that by the end of 2022 fed funds rate would be fixed between 1% and 1 ¼%.

With recently released data in regards to current inflationary pressures, the Bureau of Economic Statistics has confirmed what analysts and Americans have known for quite some time, and that is that inflationary pressures continue to spiral to higher levels with the CPI (consumer price index) now fixed at 7% in December year over year.

This brings us to the current dilemma faced by the Federal Reserve. The Federal Reserve’s more hawkish or aggressive monetary policy cannot curtail the current rise of inflationary pressures to any great degree. Many analysts, including myself, acknowledge that the Federal Reserve’s Monetary Policy as it stands with a more hawkish demeanor cannot have any dramatic effect on the cost of goods and services by themselves. Any real hope of seeing inflationary pressures diminish must be accomplished through a combination of actions by the administration as well as the monetary policy of the Federal Reserve.

As the data has clearly illustrated, the current level of inflation is based upon the high pent-up demand during the first year and ½ of the recession which in essence began in March 2020. As we approach the second anniversary of the onset of the recession, which is a direct result of a global pandemic in many ways, we are much closer to understanding the new Covid-19 virus.

However, that understanding has indicated that we are far from having any real handle on eradicating the virus. What is happening is that the virus has had a global impact as new waves created by mutations or variants of the original virus strain continue to wreak havoc on economies worldwide. It seems as though the question of what a new normal will look like at the end of the pandemic contains the real possibility that there will not be a conclusion or a point in time when the Covid-19 virus simply does not exist. Rather it is beginning to seem likely that global citizens health organizations and countries will learn more effective measures to deal with the rapid spreading of variants as they emerge.

This might mean that we are currently experiencing the new “normal,” and life, as we know it from the pre-pandemic days, will never completely return. As such people will continue their daily lives with this issue and learn to adapt to it.

Wishing you as always good trading and good health,

For those who would like more information simply use this link.

Gary S. Wagner

 

Stock Bulls Remain on Unstable Footing. Here Is Why

The US Consumer Price Inflation Index (CPI) rose 7% over the past year before seasonal adjustments, the steepest climb in prices since June 1982. Stripping out food and energy costs, which tend to be more volatile even in non-pandemic times, inflation rose to 5.5% between December 2020 and December 2021 — the biggest annual jump since February 1991.

Inflation issue

Interestingly, excluding gas and used cars, December inflation was 3.7%. The prices of cars and trucks surged +37% in December, furniture prices hiked +17%, and 49% of small businesses surveyed in December said they will increase the prices of goods and or services sold in 2022.

One thing that is worrisome is the fact protein prices (meat, poultry, fish, and egg prices) have surged +18% since December 2019. Food inflation along with fuel inflation could cause the US consumer to pull back so we need to be paying close attention. But even though prices went through the roof last year, they are still nowhere near the historic highs from the 1980s. Inflation peaked in the spring of 1980 at +14.8%.

Remember, however, then-Fed Chair in the early 80s, Paul Volcker, made it his mission to squash inflation. Volcker raised interest rates to +19% in 1981, prompting a recession, however, in 1982. I’m not looking for any type of crazy rates like back in the early-80’s but if the Fed has to raise rates fast and far enough to stop inflation the economy could certainly feel some negative ripple effects.

Covid influence

I know the second major Covid variant Delta extended the inflationary shock waves and this recent resurgence from Omicron is causing even more supply-side complications. I know many bulls are saying that we are again at peak inflation and we will soon start to ease back but who would have ever thought we would be two years in and still peaking with new daily reported Covid cases at over +1.5 million. If new variants of Covid continue to come in waves who know when inflation peaks…

The government injecting billions of dollars into the economy and paying Americans to stay home via stimulus checks when Covid case numbers started to push past 10,000 daily, and now that we are exceeding one million new cases per day all the talk is about the Fed removing stimulus and the need for Americans to get back to some type of normalcy. Now here we are full-circle… In the famous words of the Grateful Dead, “What a long strange trip it’s been.”

The December Producers Price Index is out today and expected to show an annual inflation rate of +9.8% after hitting +9.6% in November, the fastest pace on record. Higher prices for energy, wholesale food, and transportation and warehousing have been the biggest contributors to the pickup in producer inflation.

Bulls believe that once the current Covid wave subsides, consumers will once again dedicate a higher percentage of their spending to services. That will in turn alleviate the crushing demand being placed on manufacturers and the transportation sector, ultimately helping to bring down prices for both raw materials and labor.

That’s the theory at least. It’s worth noting that that exact pattern was starting to develop late last year as the Delta-driven wave was subsiding and consumers were starting to feel more comfortable doing things like go to restaurants, travel, and visit the gym. As we know, that was totally derailed by the rise of the Omicron variant that is currently roiling nearly every aspect of the global supply chain.

Bulls are cautiously optimistic that the Omicron wave will be short-lived with most experts predicting it will peak by the end of January. The big question is what kind of damage will it do to already overly stressed supply chains in the interim? Inflation trends may also depend on how things shake out in the labor market. If workers remain in short supply and wages continue moving higher, it will likely limit how much inflation eases.

Today, investors will be listening closely to several Federal Reserve members that are scheduled to deliver comments, including Fed Governor Lael Brainard who will testify before the Senate Banking Committee as part of her nomination for Fed Vice Chair.

On the earnings front, the key highlights will be Delta Air Lines and Sanderson Farms.

Is The “don’t fight the Fed” Approach Still Good for Traders?

Just as experienced traders and investors were on board with the Fed easing and propping up the economy, they are now not wanting to stand in the way as the Fed tries to slow things down a bit.

Wall Street insiders are hoping to get more clues as to just how “hawkish” the U.S. central bank might be leaning when Fed Chair Jerome Powell delivers testimony before the Senate Banking Committee today as part of his renomination process.

In very brief pre-prepared comments that were released yesterday, Powell pledged “to prevent higher inflation from becoming entrenched,” but didn’t mention any details in regard to interest rates or the Fed’s asset holdings.

Supply and demand issues

Powell noted that the economy was facing “persistent supply and demand imbalances” as a result of the pandemic reopening. Wall Street veterans are thinking the Fed will make three or four increases this year. Goldman is now forecasting four rate hikes with some insiders thinking five or six rate hikes might now be in the mix, i.e. perhaps a couple of half-point moves in rates might happen rather than the smaller quarter-point bumps.

A growing number also expect that the central bank will begin reducing its $8.8 trillion balance sheet as soon as this summer.

Anticipation of a more hawkish Fed saw 10-year Treasury yields climb to their highest levels of the pandemic last week, though they did ease a bit yesterday. In and of itself, the rise in bond yields is not surprising as investors have been anticipating this would happen in 2022 as the Fed begins lifting interest rates.

However, the climb has started sooner than many expected. The speed at which yields soared last week – +25 basis points – in particular, is tripping up the bulls, with some on Wall Street anticipating the benchmark 10-year could test +2% by the end of the first quarter. Bears are warning that investors may still be underestimating how far the Fed will need to lift its benchmark rate this year to keep inflation under control.

On the other hand, Bulls still expect current higher prices will find relief as supply chain dislocations and labor shortages normalize.

The road to both resolutions is proving longer and more complicated than most hoped, though, with the current Covid wave again threatening global supply chains and sidelining workers.

Transportation in China and US

A suspension of trucking services in several parts of China’s Zhejiang province has slowed the transportation of manufactured goods and commodities through the port of Ningbo, one of the world’s most important ports.

Some Chinese factories have had to stop work due to the trucking snags, too, as they can’t receive raw materials or ship out goods.

U.S. ports on both coasts are also reporting a build-up in ships waiting to unload due to dockworkers calling in sick. Cargo backups are also once again building as transportation and warehousing staff levels suffer.

The only economic data due today is the NFIB Small Business Optimism Index. It’s the Consumer Price Index tomorrow, and the Producer Price Index on Thursday that investors are really anxious to see, with worries growing that big jumps could spur even more hawkish policy moves from the Fed. On the earnings front, Albertsons is the main highlight.

For High-Growth Tech Lovers, the Trend Indicates That it is Time to Consider Value-Oriented ETFs

Also, subtracting 2% due to “positive sentiment” induced by the Santa Claus rally, it can be inferred that the index actually fell by more than 8%. At the same time, a look at the S&P 500 (in orange) which holds more than 28% of technology assets exhibits a more neutral position, while the Dow Jones Industrial average (in blue), up by 1.52% indicates that the more cyclical names are being prioritized by investors, as potential beneficiaries of the economic recovery.

https://static.seekingalpha.com/uploads/2022/1/9/49663886-16417501192287376.png

Source: Trading View

Going further in the past, the weakness in tech started from the second quarter of 2021 when it became evident that the Fed was adopting a more hawkish tone and bond yields were on the rise. However, the adverse market conditions for technology were masked by the gains from these six most popular stocks, namely, Tesla (TSLA), Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Meta Labs (FB), and Google (GOOGL). Now, with the Nasdaq bearing a P/E ratio of 28, tech valuations remain high compared to the broader market, and the weakness in richly-valued high-growth names in the technology sector should continue, perhaps in the same way as during the Internet bubble of 1999-2000.

Growth to value rotation

Now, moving away from high-growth tech names to lower-valued cyclical names reminds us that the “rotation from growth to value”, which some analysts were invoking in 2021, has gained momentum. For investors, rapidly growing tech stocks with their high R&D and sales expenses primarily focus on growth while value names are more conservative in spending and lay more emphasis on profitability.

To further verify whether the growth to value shift is really happening, I make a comparison between growth and value ETFs as per the chart below. In this case, the iShares Edge MSCI USA Value Factor ETF (VLUE) and the Vanguard Value ETF (VTV) are both up by 5.6% and 3.9% respectively, while the Schwab U.S. Large-Cap Growth ETF (SCHG) and the Technology Select Sector SPDR ETF (XLK) are down by more than 3% each. This one-month performance confirms that value is up, while growth/technology is down.

https://static.seekingalpha.com/uploads/2022/1/9/49663886-16417501193779671.png

Source: Trading View

Looking ahead, in view of the uncertainty associated with Covid variants, supply chain issues, and inflationary concerns in the first half of 2022, there is no guarantee that the current trend favoring value will continue, but, at the same time, we cannot remain insensible to the new market regime. Moreover, for those who have been used to investing in growth made relatively easy due to the momentum induced by the mighty Nasdaq, it may prove difficult to screen the market for high-quality value stocks with appropriate free-cash-flow, balance-sheet, and valuations metrics.

The value-oriented ETF rationale

Hence, it is precisely for these tech investors that investing in value-oriented ETFs where the fund managers select the best stocks, makes sense.

In this respect, VTV with an expense ratio of 0.04% and paying dividends at a yield of 2.15% holds mostly Financials (22%), Healthcare (18.5%), and Industrials (14%) stocks as part of total assets. Finally, for tech lovers, better performing VLUE, with 30.85% of IT exposure, and paying a 2.41% dividend yield at an expense ratio of 0.15% is a better choice.

Disclosure: I am long XLK.

 

Will 2022~23 Require Different Strategies For Traders/Investors Part II

Is The Lazy-Bull Strategy Worth Considering? Part II

I started this article by highlighting how difficult some 2021 strategies seemed for many Hedge Funds and Professional Traders. It appears the extreme market volatility throughout 2021 took a toll on many systems and strategies. I wouldn’t be surprised to see various sector ETFs and Sector Mutual Funds up 15% to 20% or more for 2021 while various Hedge Funds struggle with annual returns between 7% and -5% for 2021.

After many years in this industry and having built many of my own strategies over the past decade, I’ve learned one very important facet of trading strategy development – expect the unexpected. A friend always told me to “focus on failure” when we developed strategies together. His approach to strategy design was “you develop it do too well in certain types of market trends and volatility. By focusing on where it fails, you’ll learn more about the potential draw-downs and risks of a strategy than ignoring these points of failure”. I tend to agree with him.

In the first part of this research article, the other concept I started discussing was how traders/investors might consider moving away from strategies that struggled in 2022. What if the markets continue trending with extreme volatility throughout 2022 and into 2023? Suppose your system or strategy has taken some losses in 2022, and you have not stopped to consider volatility or other system boundaries as a potential issue. In that case, you may be looking forward to a very difficult 12 to 14+ months of trading in 2022 and 2023.

Volatility Explodes After 2017

Current market volatility/ATR levels are 300% to 500% above those of 2014/2015. These are the highest volatility levels the US markets have ever experienced in the past 20+ years. The current ATR level is above 23.20 – more than 35% higher than the DOT COM Peak volatility of 17.15.

As long as the Volatility/ATR levels stay near these elevated levels, traders and investors will likely find the markets very difficult to trade with strategies that cannot properly adapt to the increased risks and price rotations in trends. Simply put, these huge increases in price volatility may chew up profits by getting stopped out on pullbacks or by risking too much in terms of price range/volatility.

The increased volatility over the past 5+ years directly reflects global monetary policies and the COVID-19 global response to the crisis. Not only have we attempted to keep easy money policies for far too long in the US and foreign markets, but we’ve also been pushed into a hyperbolic price trend that started after 2017/18, which has increased global debt consumption/levels to the extreme.

2022 and 2023 will likely reflect a very strong revaluation trend which I continue to call a longer-term “transition” within the global markets. This transition will probably take many forms over the next 24+ months – but mostly, it will be about deleveraging debt levels and the destruction of excess risk in the markets. In my opinion, that means the strongest global economies may see some strength over the next 24+ months – but may also see extreme price volatility and extreme price rotation as this transition takes place.

Chart Description automatically generated

Expect The Unexpected in 2022 & 2023

The US major indexes had an incredible 2021 – rallying across all fears and COVID variants. The NASDAQ and S&P500 saw the biggest gains in 2021 – which may continue into early 2022. Yet I feel the US markets will continue to transition as the global markets continue to navigate the process of unwinding excess debt levels and potentially deleveraging at a more severe rate than many people expect.

Because of this, I feel the US markets may continue to strengthen as global traders pile into the US Dollar based assets in early 2022. Until global pressures of deleveraging and transitioning away from excesses put enough pressure on the US stock market, the perceived safety of US assets and the US Dollar will continue as it is now.

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(Source: www.StockCharts.com)

Watch For Sector Strength In Early 2022 As Price-Pressure & Supply-Side Issues Create A Unique Opportunity For Extended Revenues/Profits

I believe the US markets will see a continued rally phase in early 2022 as Q4:2021 revenues, earnings, and economic data pour in. I can’t see how any global economic concerns will disrupt the US markets if Q4:2021 data stays stronger than expected for US stocks and the US economy.

That being said, I do believe certain sectors will be high-fliers in Q1:2022 and Q2:2022 – at least until the supply-side issues across the globe settle down and return to more normal delivery expectations. This means sectors like Automakers, Healthcare, Real Estate, Consumer Staples & Discretionary, Technology, Chip manufacturers, and some Retail segments (Construction, Raw Materials, certain consumer products sellers, and specialty sellers) will drive a new bullish trend in 2022.

The US major indexes may continue to move higher in 2022. They may also be hampered by sectors struggling to find support or over-weighted in symbols that were over-hyped through the end of 2020 and in early 2021.

I have been concerned about this type of transition throughout most of 2021 (particularly after the MEME/Reddit rally phase in early 2021). That type of extreme trending usually leads to an unwinding process. I still don’t believe the US and global markets have completed the unwinding process after the post-COVID extreme rally phase.

Graphical user interface, chart Description automatically generated

(Source: www.StockCharts.com)

Will The Lazy-Bull Strategy Continue To Outperform In 2022 & 2023?

This is a tricky question to answer simply because I can’t predict the future any better than you can. But I do believe moving towards a higher-level analysis of global market trends when the proposed “transitioning” is starting to take place allows traders to move away from “chasing price spikes.” It also allows them to position for momentum strength in various broader market sectors and indexes.

I suspect we’ll start to see annual reports from some of the biggest institutional trading firms on the planet that show feeble performance in 2021. This recent article caught my attention related to Quant Funds in China.

I believe we will see 2022 and 2023 stay equally distressing for certain styles of trading strategies while price volatility and an extreme deleveraging/transitioning trend occur. Trying to navigate this type of choppy global market trending on a short-term basis can be very dangerous. I believe it is better to move above all this global market chop and trade the bigger momentum trends in various sectors and indexes.

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Part III of this research article will focus on Q1 through Q4 expectations for 2022 and 2023. I will highlight broader sector/index trends that may play out well for investors and traders who can move above the low-level choppiness in the US and global markets.

WANT TO LEARN MORE ABOUT THE TECHNICAL INVESTOR AND THE TECHNICAL INDEX & BOND TRADING STRATEGIES?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may begin a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

I invite you to take a few minutes to visit the Technical Traders website to learn about our Technical Investor and Technical Index and Bond Trading strategies and how they can help you protect and grow your wealth.

Have a great day!

Chris Vermeulen
Chief Market Strategist

 

Encouraging Signs the Worst of the Economic Dysfunctions May Be Behind Us

There are encouraging signs that the worst of the pandemic-induced economic dysfunctions may be behind us. Factory surveys released for the U.S., Europe, and Asia this week have shown a further easing of supply chain problems as well as a slowdown in cost increases during December.

What drives the market today?

Some on Wall Street, however, remain concerned that the latest Omicron-driven wave will derail those improvements and possibly deepen the ongoing labor and supply shortages.

Bulls want to believe that any fallout from the current wave will only be short-term as the Omicron variant is expected to burn itself out fairly quickly. In fact, much of the current commentary from the bull camp anticipates that Covid, supply chain dislocations, and inflation will all peak in the early part of 2022.

Data from the Labor Department yesterday showing that job openings fell in November further supports the bull’s view that the economy is starting to “normalize,” although the number of unfilled jobs remains far above both last year and pre-pandemic levels.

Still, it’s a move in the right direction for the very tight labor market that has been driving wages higher, another factor that is feeding inflation. The Labor Department’s latest employment report, to be released Friday, is projected to show employers added 405,000 jobs in December with the unemployment rate ticking down to 4.1% and wage growth seeing another +0.3% gain.

Investors got a preview of Friday’s report with ADP’s private payroll report today, which showed 807.000 new jobs added last month.

FOMC Minutes

Today also brings “minutes” from the Federal Reserve’s December meeting that saw the central bank make a decidedly hawkish shift with plans to more quickly wrap up its asset purchase “taper” and projections for as many as three interest rates in 2022.

Debate about when and by how much the Fed will shrink its $8.76 trillion asset portfolio is already starting to hit headlines. There are growing concerns that the Fed will start offloading its holdings sooner and faster than most anticipate, which Wall Street has mostly been anticipating will begin in 2024, at the earliest.

Keep in mind that the new year brings the annual rotation in voting members of the Federal Open Market Committee (FOMC). The FOMC consists of the seven members (currently only four seats filled) of the Board of Governors; the president of the New York Fed; and four of the remaining eleven Reserve Bank presidents Rotating onto the FOMC in 2022 are St. Louis Fed President James Bullard, Kansas City Fed President Esther George, Boston Fed President Eric Rosengren, and Cleveland Fed President Loretta Mester, all of which tend to lean more hawkish than their predecessors.

There are three vacant Board of Governors seats to fill so investors will be closely monitoring developments on that front.

Bulls could start to get more nervous if those are also filled with officials that are viewed as more hawkish-leaning. The Fed’s next policy meeting is on January 25-26.

 

Gold Finds Support at $1798 and Moves Higher as Omicron Variant Surges

According to the CDC, the new variant “omicron” represents 95% of all new cases in the U.S.

According to Reuters, “The United States set a global record of almost 1 million new coronavirus infections reported on Monday, according to a Reuters tally, nearly double the country’s peak of 505,109 hit just a week ago as the highly contagious Omicron variant shows no sign of slowing. The number of hospitalized COVID-19 patients has risen nearly 50% in the last week and now exceeds 100,000, a Reuters analysis showed, the first time that threshold has been reached since the winter surge a year ago.”

According to the World Health Organization, the good news is “evidence thus far suggests Omicron is causing less severe illness. Nevertheless, public health officials have warned that the sheer volume of Omicron cases threatens to overwhelm hospitals, some of which are already struggling to handle a wave of COVID-19 patients, primarily among the unvaccinated.”

The surge in new infections coupled with a weaker than expected U.S. manufacturing report was the primary component that took gold higher today. The ISM manufacturing index was forecasted to come in at 60.0%. However, the actual number came in below that at 58.7%. The ISM report clearly showed that growth amongst U.S. manufacturers is slowing faster than expected. The concern is that inflationary pressures will continue to grow and stifle economic recovery.

As of 4:23 PM EST gold futures basis, the most active February contract is fixed at $1814.90 after factoring in today’s gain of 0.82%, or $14.80. Silver also had strong advances today with the most active March 2022 contract currently up $0.28 and fixed at $23.09.

Gold January chart

On Friday, the U.S. Labor Department will release the jobs report for December 2021. This will certainly be the most important report that comes out this week. Current forecasts from economists polled by various new sources are indicating that the unemployment rate will decline to 4.1% and that the United States will have filled an additional 410,000 jobs. This is after a tepid jobs report last month which showed that only 210,000 new jobs were added in November.

The forecasted numbers for Friday’s jobs report are currently being baked into the current pricing of the financial markets, including the precious metals. If the actual numbers come in well under the forecasted predictions, we could see a continuation of solid bullish market sentiment for gold and silver. However, if they come in at or above the forecasted projections, it could certainly diminish the bullish market sentiment that currently exists in both metals.

Wishing you as always good trading and good health,

For those who would like more information simply use this link.

Gary S. Wagner

 

Should Investors Trust Today’s Stock Market Rise?

Stock bulls seem ready to move beyond the lingering concerns about the latest Omicron-driven coronavirus surge with many insiders expecting little if any lasting economic damage.

Coronavirus surge

The biggest concern remains the possibility of more supply chain disruptions with companies around the world reporting major staffing shortages as a result of so many workers being out sick and or testing positive. That’s in addition to the generally tight labor supply that is currently plaguing many Western countries, including the United States.

Health officials expect the current U.S. wave will start to subside in just a few short weeks. Investors are also closely monitoring the situation in China where millions of people are under lockdowns, creating shortages of workers at key factories as well as disrupting cargo movement to and from the Ningbo-Zhoushan port, the world’s largest by container volume.

China is the only major country in the world that is still trying to maintain a “zero-Covid” policy, even as the resulting lockdowns and other severe restrictions have consistently been a source of major supply-chain disruptions.

The policy has been flagged as one of the biggest risks to global growth in 2022 by numerous analysts and risk consultants, particularly if future mutations continue to jump immunity protections like the Omicron variant seems to do.

A continuation of the policy likely means ongoing supply constraints for global importers and further fanning of inflation flames. Personally, I think China is trying to keep a lid on Covid until they get past the Winter Olympics which start in February.

Inflation issue

Here at home, inflation remains the key economic headline in the spotlight with the Prices Paid component of the ISM Manufacturing Index out today and expected to tick slightly lower again this month, which would mark two months of price gain slowdowns.

Several Wall Street insiders are saying inflation has peaked but may take a while to slowdown and this data might help confirm that opinion. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) is also due out today with most expecting job openings to come in near record levels.

Keep in mind, the survey data is for November which is when many companies were trying to hire seasonal help for the holidays, so it’s not the most relevant and up-to-date data.

The December Employment Report due on Friday is the labor data investors are most anxious to see this week. Investors this morning will also be digesting manufacturing data for China, which was released overnight. Also on the calendar today is the monthly OPEC meeting with the group expected to stick to its planned +400,000 barrel per month production increase.

It’s worth noting that the group has failed to meet production targets with several members suffering from capacity constraints and other disruptions. OPEC oil producers fell short of their targets by -650,000 barrels per day in November and -730,000 barrels per day in October, according to International Energy Agency (IEA). Don’t forget, we have the Fed’s latest FOMC minutes scheduled for release tomorrow. The market seems to now be forecasting 63% odds of the Federal Reserve increasing rates at the March 16th meeting which is well above the 27% odds the market was forecasting about a month ago. It will be interesting to see how aggressive the Fed wants to be in battling inflation.

 

XLV: Confidence in Medical Science at Containing Covid Is Highly Beneficial

The year 2020 was so hard for most of us as the pandemic struck bringing an unprecedented level of disruption to our lives. It’s now more than two years that the world is affected by the deadly and invisible virus with millions being infected and millions more have lost their jobs as the economies of many countries were devastated and governments were challenged into putting into place tough social distancing measures.

However, while infection rates have reached a new peak with the Omicron strain (as per the chart below in blue), the number of people who have actually lost the battle against the invisible enemy continues to fall as depicted by the death rate in the grey chart below trending lower.

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Source: Google

There are many reasons for the decrease in death rate with the most important ones being the rise in vaccination among populations worldwide as well as the provision of better hospital-level care to patients infected with Covid. This has been made possible by new antibodies treatments. For this purpose, the Health Care Select Sector SPDR Fund (XLV) includes key plays like Johnson and Johnson (JNJ) with its Janssen vaccine as well as Pfizer (PFE) with its Covid pill, as longer-term solutions to countering Covid.

Apparently trivial, but equally important, there is the important role played by diagnostics companies in early detection of the coronavirus so that infected people can be isolated. This separation act has been critical in order to contain the infection, in turn reducing hospitalization rates. Here, companies like Thermo Fisher (TMO) and Abbott (ABT) who were quick to develop relatively cheap Covid tests come to mind. In this respect, for those wondering about the role of these medical devices and tool plays in the future where Covid becomes more analogous to “normal” seasonal flu, there is the stark reality of the coronavirus mutating rapidly into Alpha, Delta, and Omicron strains. Thus, the market for Covid testing should become a constant in the new normal.

https://static.seekingalpha.com/uploads/2022/1/3/49663886-16411948065317018.png

Source: ssga.com

Moreover, XLV is not just about Covid as seen with health insurance plays like United Healthcare (UNH). The company makes the system work better for everyone by simplifying the health care experience through the use of advanced data and technologies, breakthrough treatments, and consumer choice. Talking diversification, with normalization in health care, there are a number of sectors including ophthalmology and dentistry as well as clinical trials activities in areas like biotech research which should prove beneficial for XLV’s holdings.

The market seems to already have realized this, rewarding XLV with 7.36% during the last month against only 2.69% for the S&P 500.

Source: Trading View

I believe that this outperformance should continue in 2022, as the role of medical science, especially through sequencers in rapidly understanding the DNA of the coronavirus as well as its mutants has been established. There may be periods of doubt as for example when investors’ high expectations of Merck’s Covid pills were dashed when some clinical trial data suggested that Molnupiravir was less effective than originally thought. This resulted in volatility in the State Street fund around December 13. Subsequently, XLV rapidly overcome this “volatility episode” and is now at the $140-141 range.

Looking at the sector, XLV comes with an expense ratio of just 0.12% and a dividend yield of 1.32%. Another peer, the Vanguard Health Care ETF (XHT) does offer lower fees of just 0.10%, but, it is the State Street fund that has outperformed both on a one-year and one-month basis, by 600 and 110 basis points respectively.

Finally, in line with its five-year performance, XLV should continue with its uptrend and reach the $150-155 level by the middle of 2022.

 

2021: A Year Defined by Soaring Inflation, Covid Variants & Market Resilience

After an extremely chaotic 2020, the world pinned hopes on stability and normality returning this year.

Indeed, 2021 kicked off on a positive note as the mass vaccinations against Covid-19 and confirmation of Joe Biden’s victory in the presidential election boosted investor confidence.

Renewed stimulus hopes from Biden’s $1.9 trillion economic rescue plan fuelled the risk-on mood, propelling US stocks to record highs during the first month of 2021. Console retailer GameStop also hijacked the headlines by surging over 1600% in January as a group of investors on Reddit fuelled a short squeeze in the company’s shares.

In February, a sense of caution enveloped global markets as investors mulled over the possibility of rising inflation becoming a major theme. Signs of inflation were already spotted across the globe amid supply-chain disruptions, while prices pressures were expected to return amid an economic boom powered by vaccines and pent-up consumer demand. Taking a look at commodities, gold tumbled to an 8-month low under $1720 thanks to rising yields, dollar strength, and growing global risk appetite.

Things started getting sticky in March as coronavirus variants appeared across the globe. In the United Kingdom, the B.1.1.7 strain was initially considered more lethal than earlier variants. Different variants of the novel coronavirus were also reported in Brazil and even India which saw a spike in cases despite vaccine rollouts. On the currency front, the dollar appreciated against almost every single G10 currency as investors speculated that the massive fiscal stimulus and aggressive vaccinations would help the US economy recover.

Q2 kicked off on a positive note despite global economic uncertainty caused by the ongoing pandemic. Equity bulls remained in the driving seat amid robust Q1 earnings, the Fed’s pledge to keep rates lower for longer, and China’s eye-popping 18.3% growth in the first quarter.

In other news, Coinbase made its debut on Nasdaq on April 14th which was seen as a watershed moment for the cryptocurrency industry.

Everyone was talking about copper in May as the commodity surged to a record high of $4.9. The rally was triggered by the reopening of major economies and the robust demand for minerals needed for the green energy agenda. Given how copper is used in everything from electric vehicles to home appliances like washing machines, the outlook was heavily bullish – especially amid the bigger global focus on green energy. The commodities boom, fuelled by rising global demand and supply shortages fuelled fears around inflation across the globe.

In the United Kingdom, the Delta variant of Covid-19 clouded economic recovery hopes in June. As the third wave of Covid-19 cast doubt on more lockdown easing before July, the British Pound tumbled against every single G10 currency, sinking as low as 1.3790 against the dollar.

It was not only the UK affected by the Delta variant, it swept across Europe and started gaining ground in the United States. Hotspots were also found in Asia and Africa.

A sense of unease gripped markets in July as Covid-19 cases across the globe surged. The International Monetary Fund (IMF) warned that unequal access to Covid vaccines risked derailing the global recovery. Global stocks displayed resilience despite the Delta variant fuelling the surge in coronavirus cases worldwide. Infact, the S&P500 concluded the month of July almost 2% higher despite the growing uncertainty. Down under, the Australian dollar collapsed like a house of cards due to a surge in virus infections and lockdown restrictions in Australia.

Hong Kong stocks stole the spotlight in August as the tech-heavy Hang-Seng Index briefly tumbled into bear market territory, dropping more than 20% from its mid-February peak. The descent was driven by China’s regulatory crackdown on sectors ranging from financial technology to education and gaming.

Risk-off was the name of the game during the final month of Q3 thanks to inflation fears, growth concerns, and mounting uncertainty over Covid-19. As inflation made itself at home in the United States, Federal Reserve policymakers were forced to accept that inflation proved to be larger and more long-lasting than expected. The terrible combination of growth doubts, turmoil surrounding China’s Evergrande and Fed taper fears saw the S&P500 fall 4.8% in September.

Oil prices exploded higher in October, with WTI rising beyond $80 for the first time since 2014 as surging natural gas prices spurred greater demand for crude ahead of winter.

Tight global supply and robust fuel demand in the United States and beyond energized oil bulls. WTI concluded the first month of Q4 roughly 10% higher while Brent was not too far behind gaining 6%. Interestingly, the IMF and World Bank both issued warnings over rising inflation.

After “talking about talking about” tapering for many months, the Federal Reserve finally made a move in November.

This marked a crucial turning point as it stepped away from its emergency policy. In a process known as tapering, the Fed was set to reduce $120 billion in monthly purchases of Treasuries and mortgage-backed securities. The mighty dollar appreciated across the board, boosted by increased expectations for a reduction in the Fed’s asset purchase and interest rate hike, possibly in late 2022. During this month, the World Health Organization (WHO) also declared a new coronavirus variant to be “of concern” and named it Omicron. It was first reported to the WHO from South Africa on 24 November.

Growing uncertainty over the Omicron variant weighed heavily on market sentiment in December. With the new variant in town spreading faster than the more prevalent Delta, this clouded the global growth outlook as countries across the globe announced tighter restrictions.

The end of 2021 saw major central banks turning hawkish in the face of rising inflation.

As one of the largest central banks in the world embarked on the path to policy normalization, other banks wasted no time to tighten. We saw the Reserve Bank of New Zealand (RBNZ) raise interest rates in November, the Fed doubling down on its stimulus taper in December, and the Bank of England (BoE) also surprising markets by hiking rates. Indeed, with US inflation skyrocketing 6.8% in the year through November and consumer prices soaring across the globe, this offers a taster of what to expect in 2022.

One key thing to keep in mind is that the S&P500 closed at record highs 69 times this year despite the global growth fears and covid related uncertainty.

US equity bulls were certainly in the driving seat throughout 2021 with the S&P500 up over 27% year-to-date, marking its third straight annual increase.

There is no doubt that 2021 was a historic year defined by runaway inflation, coronavirus variants, and resilient stock markets.

With persistent inflation likely to remain a major theme in 2022, it will be interesting to see whether this forces more central banks to tighten monetary policy. Let’s not forget about the current Omicron menace and risks of new variants potentially clouding the global economic outlook. Equity bulls dominated the scene this year but will we see the same in 2022? Or will the combination of rising inflation and tighter monetary policy end the bull run?

We saw some extreme events throughout 2021 with the show set to continue in 2022. It may be wise to fasten your seatbelts in preparation for another eventful and potentially volatile year for financial markets as 2021 slowly comes to an end.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

EDV: Long Term Bonds for Portfolio Diversification with the S&P 500 at Record High

This ETF which provides exposure to long-term bonds has been moving in opposite sides to the SPDR S&P 500 ETF (SPY) which delivered a 148.4% performance during the last five years. In relative terms, EDV delivered a meager 9.97% gain.

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Source: tradingview.com

Looking into the reason for this underperformance, there is the yield of the 10-year U.S. Treasury note which rose by more than 1% from August 2020 through late March 2021. Now, as bond prices fall with rising rates, EDV’s share price started falling as shown by the blue dotted marker starting on August 3, 2020 (above chart). Pursuing further, the brown marker (dotted line at March 21) marks the end of EDV’s downtrend coinciding with the end in the rise of the treasury yields.

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Source: advisors.vanguard.com

Just one year earlier, or in March 2020, EDV’s investment-grade bonds performed well during the market crash, while the S&P 500 suffered for a longer period as shown by the orange chart dipping by nearly 50% before recovering only six months later. Getting further support from Vanguard Research for January through March 2020, this period marked a height in volatility for equities due to the COVID-19 pandemic, with investment-grade bonds worldwide returning just over 1% while equities fell by almost 16% globally.

This outperformance of bonds was again noted during the global financial crisis (2008-2009) when stocks sank by an average of 34% while the market for investment-grade bonds returned more than 8%. The same was noted for several other market cycles from January 1988 through November 2020, which showed that whenever equity returns were down, bonds remained positive for most of the time.

Such uncorrelated returns between equities on the one hand and investment-grade bonds on the other demonstrate the diversification benefits of an asset-class level diversification can offer investors, especially at times of acute market turbulence. In this case, it is a balanced portfolio in stocks and bonds. Consequently, the temporary “volatility” seen in the performance of bonds as a result of changes in interest rates from August 2020 to May 2021 should not constitute an excuse for a strategic change in the allocation of fixed income versus equities in your portfolio.

In this case, just like equities, there are near-term risks in owning bonds, but, for the long-term, as seen by EDV’s five-year performance of nearly 10%, one can still stick to a time-tested formula like government bonds.

My point here is to hold bonds as a part of your portfolio, aiming for a 60:40 asset allocation in favor of equities. For this purpose, there are other long-term bonds ETF like the iShares 20+ Year Treasury Bond ETF (TLT), but I prefer the Vanguard ETF as at $140, it remains far from its high of $175, thus available at a relative bargain. Additionally, it pays quarterly dividends with a higher yield of 1.94%, compared to 1.49% for TLT. EDV also has a lower expense ratio of only 0.06% as shown in the table below.

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Source: investor.vanguard.com

Finally, unlike equity investing, investment-grade bonds must be considered as a longer-term investment. For this matter, EDV seeks to track the performance of the Bloomberg U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index, which is passively managed using index sampling. The index provides fixed income with high credit quality.

Predictive Modeling Suggests 7~10% Rally In SPY/QQQ Before April 2022

The recent rotation in the SPY/QQQ has shaken some traders’ confidence in the ability of any potential rally – blowing up expectations of a Santa Rally. Yet, here we are with only five trading days before the end of 2021, and the US major indexes are nearing all-time highs again.

PREDICTIVE MODELING SHOWS A CONTINUED MELT-UP TREND THROUGH JAN/FEB 2022

Our Adaptive Dynamic Learning (ADL) Predictive Modeling system may hold the answers you are looking for. Let’s look at a few charts to prepare for what may unfold over the next 60+ days.

First, this SPY Weekly ADL chart highlights the range of potential outcomes going forward into March/April 2022. The further out we attempt to predict using this technique, the more opportunity exists for outlier events (unusual price trends/activity). Yet, the SPY ADL predictive modeling system suggests a very strong upward price trend in January/February 2022, with a possible narrowing of price in late February – just before another big move higher in March/April 2022.

There is an outlier trend that appears below the current price trend. So far, this outlier trend has not aligned with price action over the past 5+ weeks and shows an alternate support level near $430.

The ADL predictive modeling system suggests a broad market uptrend is likely in the SPY, with an initial target near $490 possibly being reached by early February. If Q4:2021 earnings come in strong and revenues continue to impress the markets, we may see a rally above the $490 level before the end of February 2022.

After the tightening of price near the end of February 2022, it appears the SPY will consolidate near $480, then enter another rally phase and attempt to rally above $500. This type of price action aligns with solid Q4:2021 expectations and continued Q1:2022 economic growth.

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ADL PREDICTS QQQ WILL RALLY ABOVE $430 BY MARCH/APRIL 2022

This Weekly QQQ ADL Chart highlights a similar type of price trend compared to the SPY. The QQQ appears to have a more consistent upward trend bias with a fairly solid upward price channel trending through the first four months of 2022. It appears the QQQ will rally to levels above $420 by mid-February 2022, then stall for a few weeks, then resume a rally trend through most of March 2022 and into early April 2022. After mid-April 2022, it appears the QQQ will consolidate, again, near the $420~$425 level.

This ADL prediction suggests Technology, Healthcare, Consumer stables/discretionary, Real Estate, and other sectors will continue to do well in Q1:2022 and beyond. A rally of 7% to 10% in the first few months of 2022 may send the US markets dramatically higher throughout the rest of 2022 if economic growth stays strong.

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The ADL predictive modeling system has proven to be a valuable tool in understanding what lies ahead for the markets. Not only does it show a range of potential outcomes and price targets, but it also helps us understand if and when price breaks beyond these ADL predictive ranges (which translates into a unique price anomaly).

Price anomalies happen. The COVID-19 price collapse represented a unique price anomaly in 2020. This event, somewhat like a Black Swan event, hit the markets hard and quickly sent prices tumbling. It is important to understand that these events can still happen in the future and can dramatically disrupt expected price trends.

Still, if the ADL predictive price trends continue to be accurate, it looks like Q1:2022 and Q2:2022 may continue to see moderate upward price trends with bouts of sideways volatility taking place. The range of the ADL predictive levels (the MAGENTA LINES) shows the type or expected volatility in the markets for Q1 and Q2. It appears volatility will stay elevated over the next 6+ months – so get ready for some big, explosive price trends.

Watch for the markets to continue to melt higher over the next few weeks as traders prepare for Q4:2021 earnings to start hitting in early January 2022. We may see the US markets start another big upside price trend – possibly breaking to new all-time highs soon enough.

WANT TO LEARN MORE ABOUT PREDICTIVE MODELING?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

Please take a minute to visit www.TheTechnicalTraders.com to learn about our Total ETF Portfolio (TEP) technology and how it can help you identify and trade better sector setups. We’ve built this technology to help us identify the strongest and best trade setups in any market sector. Every day, we deliver these setups to our subscribers along with the TEP system trades. You owe it to yourself to see how simple it is to trade 30% to 40% of the time to generate incredible results.

Have a great day!

Chris Vermeulen
Chief Market Strategist

 

Key Events This Week: Omicron Fears to Dent S&P 500’s Hopes for New Record High?

Can this benchmark index for US stocks climb to a fresh peak before the year is over, taking advantage of the lack of major economic data and events?

Monday, December 27

  • Australian, UK markets closed
  • CNH: China November industrial profits
  • USD: US December manufacturing activity

Tuesday, December 28

  • Crude: weekly API report on US crude oil inventories, supply and demand
  • JPY: Japan November unemployment, industrial production

Wednesday, December 29

  • USD: US November wholesale inventories
  • US crude: EIA weekly US crude oil inventory report

Thursday, December 30

  • EUR: ECB economic bulletin
  • USD: US initial weekly jobless claims

Friday, December 31

  • CNH: China December manufacturing and non-manufacturing PMIs

Considering the light economic calendar in this final week of 2021, Omicron-related headlines are set to hold sway over market sentiment before we bring the curtains down on the year.

Even so, S&P 500 futures are edging higher at the time of writing.

Although the number of Covid cases have recently spiked in major economies, from the United States to China, the market’s risk appetite has so far appeared willing to look past such concerns. After all, this isn’t the world’s first rodeo against a new variant, and are hoping that the global economy has enough resilience and know-how to overcome it. Such a notion is buffered by the higher vaccination rates globally, which suggest that Omiron’s impact might not be as severe as in the past.

Still, an unexpected turn for the worse in this ongoing battle against Covid-19, which is entering its third year, could see a sharp decline in risk assets. If so, market jitters could be amplified by the thinner liquidity and lower volumes that typically accompany the year-end period.

By Han Tan Chief Market Analyst at Exinity Group

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Fear May Drive Silver More Than 60% Higher In 2022

Historically, Silver is extremely undervalued compared to Gold right now. In fact, Gold has continued to stay above $1675 over the past 12+ months while Silver has collapsed from highs near $30 to a current price low near $22 – a -26% decline.

Many traders use the Gold/Silver Ratio as a measure of price comparison between these two metals. Both Gold and Silver act as a hedge at times when market fear rises. But Gold is typically a better long-term store of value compared to Silver. Silver often reacts more aggressively at times of great fear or uncertainty in the global markets and often rises much faster than Gold in percentage terms when fear peaks.

Understanding the Gold/Silver ratio

The Gold/Silver ratio is simply the price of Gold divided by the price of Silver. This creates a ratio of the price action (like a spread) that allows us to measure if Gold is holding its value better than Silver or not. If the ratio falls, then the price of Silver is advancing faster than the price of Gold. If the ratio rises, then the price of Gold is advancing faster than the price of Silver.

Right now, the Gold/Silver ratio is above 0.80 – well above a historically normal level, which is usually closer to 0.64. I believe the current ratio level suggests both Gold and Silver are poised for a fairly big upward price trend in 2022 and beyond. This may become an exaggerated upward price trend if the global market deleveraging and revaluation events rattle the markets in early 2022.

I expect to see the Gold/Silver ratio fall to levels below 0.75 before July/August 2022 as both Gold and Silver begin to move higher in Q1:2022. Some event will likely shake investor confidence in early 2022, causing precious metals to move 15% to 25% higher initially. After that initial move is complete, further fallout related to the deleveraging throughout the globe, post-COVID, may prompt an even bigger move in metals later on in 2022 and into 2023.

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COVID Disrupted The 8~9 Year Appreciation/Depreciation Cycle Trends

In May 2021, I published an article suggesting the US Dollar may slip below 90 while the US and global markets shift into a Deflationary cycle that lasts until 2028~29 (Source: The Technical Traders). I still believe the markets will enter this longer-term cycle and shift away from the broad reflation trade that has taken place over the past 24+ months – it is just a matter of time.

If my research is correct, the disruption created by the COVID virus may result in a violent reversion event that could alter how the global markets react to the deleveraging and revaluation process that is likely to take place.

I suggest the COVID virus event may have disrupted global market trends because the excess capital poured into the global markets prompted a very strong rise in price levels throughout the world in real estate, commodities, food, technology, and many other everyday products. The opposite type of trend would have likely happened if the COVID event had taken place without the excessive capital deployed into the global markets.

Demand would have diminished. Price levels would have fallen. Demand for commodities and other technology would have fallen too. That didn’t happen. The opposite type of global market trend took place, and prices rose faster than anyone expected.

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Markets Tend To Revert After Extreme Events

As much as we may want to see these trends continue forever, any trader knows that markets tend to revert after extreme market trends or events. In fact, there are a whole set of traders that focus on these “reversion events.” They wait for extreme events to occur, then attempt to trade the “reversion to a mean” event in price action.

My research suggests the COVID virus event may have created a hyper-cycle event between early 2020 and December 2021 (roughly 24 months). My research also suggests a global market deleveraging/revaluation event may be starting in early 2022. If my research is correct, the recent lows in Gold and Silver will continue to be tested in early 2022, but Gold and Silver will start to move much higher as fear and concern start to rattle the markets.

As asset prices revert and continue to search for proper valuation levels, Gold and Silver may continue to rally in various phases through 2028~2030.

Initially, I expect a 50% to 60% rally in Silver, targeting the $33.50 to $36.00 price level. For SILJ, Junior Silver Miners, I expect an initial move above $20 (representing a 60%+ rally), followed by a follow-through rally targeting the $25.00 level (more than 215% from recent lows).

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I believe the lack of focus on precious metals over the past 12+ months may have created a very unusual and efficient dislocation in the price for Silver compared to Gold. This setup may present very real opportunities for Silver to rally much faster than Gold over the next 24+ months – possibly longer. If my research is correct, the Junior Silver Miners ETF, SILJ, presents a very good opportunity for profits.

Want to learn more about the movements of Gold, Silver, and their Miners?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio.

Pay particular attention to what is quickly becoming my favorite strategy for income, growth, and retirement – The Technical Index & Bond Trader.

Have a great day!

Chris Vermeulen
Chief Market Strategist

Risk-on Sentiment Creeps Back Up

Market participants are given some respite from Omicron fears, hoping that the global economy could still take in stride Omicron’s eventual impact. Asian and European equities are a sea of green, while US stock futures point to gains at the New York open.

The S&P 500 will be attempting to end a 3-day losing streak, with buy-the-dip agents triggered into action once more as the blue-chip index neared its 100-day simple moving average (SMA). This key technical indicator had earlier this month already provided support for the benchmark index for US stocks before sending it onto a fresh record high. Bulls will be hoping for a recurrence before the curtains are brought down on 2021.

Still, it’s worth noting that the thinner liquidity amid this year-end period could be exaggerating price moves.

Hence, I won’t be reading too much into the market action until there’s more clarity from a fundamental perspective, be it on Omicron’s impact on the global economy, or the effectiveness of the Fed’s response to sticky inflation.

Gold prices hemmed in by uncertainties over precious metal’s trajectory

Despite taking advantage of the moderating US dollar today, spot gold remains supressed below the psychologically-important $1800 level as well as its 200-day SMA, and is on course for its first annual decline in three years. Even after posting higher lows since August, gold bulls have been unable to capitalise on that rising support level to push prices onto higher highs.

This triangle that’s forming could force an eventual breakout, though its direction and the fundamental catalyst remains uncertain.

For bullion bulls, they’ll be hoping that real yields on US Treasuries would remain mired in negative territory, which would support gold’s appeal, considering its traditional role as an inflation hedge.

On the other hand, market participants are aware that nominal yields on US Treasuries could yet climb higher if bond markets share the conviction that the Fed’s pencilled-in rate hikes in 2022 would actually produce the desired result of dampening inflationary pressures. More importantly, Treasury yields could spike higher if the bond markets think the risks of a major policy mistake by the Fed are subsiding. Such a climb in Treasury yields could then erode the appeal of gold, as risk-on sentiment takes over, leaving safe haven assets like gold in the dust.

By Han Tan Chief Market Analyst at Exinity Group

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Omicron and EU Power Volatility Dominate Focus Into Year-End

Commodities traded mixed during a week which saw the US FOMC deliver an expected hawkish message as they stepped up efforts to combat surging inflation. However, a vicious post-FOMC reversal in risk sentiment unfolded, driving the dollar and bond yields lower, thereby supporting a recovery among some the commodities that had been under pressure ahead of the FOMC meeting. Crude oil traded mixed with the omicron variant clouding the short-term outlook while in Europe the energy crisis showed no signs of abating with strong demand not being met by an equally strong supply response.

US Treasuries, a key directional guide for investment metals, also delivered a surprise post-FOMC reaction. Just the day after making a hawkish shift complete with a fresh series of stronger economic, inflation and Fed policy forecasts, yields dropped along the entire curve. Apart from a relief rally driven by a deeper knowledge about the thinking within the central bank, the reaction was most likely also supported by the continued and rapid spreading of the Omicron virus, with the new variant driving a surge in cases around the world.

Despite the tailwind from a weaker dollar, the oil market traded softer with short-term demand concerns related to the Omicron virus supporting the International Energy Agency in its forecast for an oversupplied market into the early months of 2022. Natural gas prices continued to diverge with mild US winter weather driving prices down to levels normally seen during the summer months, while here in Europe a perfect storm of price-supportive events helped drive gas and power prices to fresh record highs.

The result of these developments was a relatively neutral week for the Bloomberg Commodity Index, which tracks a basket of major commodities spread evenly between energy, metals, and agriculture. Thereby consolidating its very strong 2021 performance, currently at 24%, the strongest annual jump since 2001.

Precious Metals

Precious metals received a boost after the FOMC meeting delivered the expected hawkish tilt. Both metals had been under pressure since the surprisingly hawkish acceptance speeches from Fed chair Powell and vice chair Brainard on November 22. With most of the announced actions being priced in ahead of the meeting, both metals seized the opportunity to claw back some of their recent losses. With 10-year real yields returning to pre-FOMC levels below –1% and the dollar seeing its biggest retreat since October, gold managed to break above its 200-day moving average, a level that had been providing resistance in the run up to the meeting.

The outlook for 2022 remains clouded with most of the bearish gold forecasts being driven by expectations for sharply higher real yields. Real yields have throughout the past few years shown a high degree of inverse correlation with gold, and it’s the risk of a hawkish Fed driving yields higher that currently worries the market.

However, with three rate hikes already priced in for 2022 and 2023 and with gold trading at levels which look around 0.25% too cheap relative to 10-year real yields, the downside risk should be limited unless the Fed over the coming weeks and months turns up the rhetoric and signals a more aggressive pace of rate hikes.

It is also worth keeping in mind that rising interest rates will likely increase stock market risks with many non-profit high-growth stocks suffering a potential revaluation. In addition, concerns about persistent government and private debt levels, increased central bank buying and the dollar rolling over following months of strength, are all potential drivers that could offset the negative impact of rising bond yields.

Having broken above resistance-turned-support at $1795, gold will find support from short-term momentum buyers, but for the newfound strength to extend beyond that, longer-term focused investors need to emerge, and so far, total holdings in bullion-backed exchange-traded funds are not showing any signs of picking up. Perhaps due to the time of year when only strong investment cases are being reacted upon while others are being postponed to January.

Silver also deserves some attention after once again managing to find support, and since September buyers have emerged on four occasions below $22, thereby preventing a challenge at $21.15 key support from 2016. The chart action could potentially signal a major low is in the process of being established, but for now the metal needs support from both gold and industrial metals to force a major change in the direction.

Industrial Metals

Industrial metals, just like precious metals, received a post-FOMC boost but not before once again fending off another downside attempt with copper temporarily falling to a two-month low. Supporting the recovery was news that Chinese production of aluminum for November slowed due to persistent restrictions on energy consumption, thereby driving increased demand for stocks held at LME-monitored warehouses. Copper meanwhile found support after one of Peru’s biggest mines started winding down production amid community protests hampering output.

Annual outlooks and price forecasts from major banks with a commodity operation have started to roll in, and while the outlook for energy and agriculture is generally positive, and precious metals negative, due to expectations for a rise in US short-term rates and long-end yields, the outlook for industrial metals is mixed. While the energy transformation towards a less carbon intensive future is expected to generate strong and rising demand for many key metals, the outlook for China is currently the major unknown, especially for copper where a sizable portion of Chinese demand relates to the property sector.

Considering a weak pipeline of new mining supply, we believe the current macro headwinds from China’s property slowdown will begin to moderate through the early part of 2022, and with inventories of both copper and aluminum already running low, this development could be the trigger that sends prices back towards and potentially above the record levels seen earlier this year. Months of sideways price action has cut the speculative length close to neutral, thereby raising the prospect for renewed buying once the technical outlook improves.

Crude Oil

Crude oil dipped on Friday to trade down on the week as Omicron developments continue to impact the short-term demand outlook. A weaker dollar has been offset by tighter monetary policies potentially softening the 2022 growth outlook further. While Europe is dealing with a worsening energy crisis, milder than normal weather in Asia has led to a less demand for fuel products used in power generation and heating. With the clouded outlook we expect most of the trading ahead of New Year to be driven by short-term technical trading strategies.

With the International Energy Agency, as well as OPEC forecasting a balance market during the early months of 2022, the risk of higher prices may have been delayed but not removed. We still maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.

EU Gas and Power Market

The EU gas and power market surged to a new record high on Thursday before paring back gains on Friday after Gazprom booked some pipeline capacity. Before then, the Dutch TTF gas future had closed above €140/MWh or $45/MMBtu, more than nine times the long/term average, while German Power traded more than six times higher than the long-term averaged at €245/MWh.

A combination French nuclear power plants temporary shutting down due to faults on pipes, an expected cold snap next week and low flows from Russia continue to reduce already-low inventories. Adding to this is US pressure to apply sanctions on Russia over Ukraine and German regulators saying the Nord Stream 2 gas pipeline may not be approved before July.

The market is clearly driven by fears about a February shortage of gas and with this in mind the market will continue to focus intensely on short-term weather developments as well as any signs of increased supplies from Russia. An improvement in both could see prices suffer a sharp correction as current levels are killing growth, raising inflation while creating pockets of fuel poverty across Europe.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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Federal Reserve Decision: Hottest Topic on Wall Street Today

The final policy update of 2021 will be accompanied by new quarterly economic projections and interest rate forecasts.

In September, the Fed’s projections showed officials were divided on whether to lift rates at all in 2022, with the so-called “dot plot” indicating just one rate hike in 2022 and three in 2023.

Investors expectations

Fast forward to today, insiders are now expecting three rate hikes in 2022 and perhaps even four. Most also anticipate the Fed will quicken the pace of its asset “taper” from the current $15 billion per month reduction to as much as $30 billion per month starting in January.

At that rate, the Fed’s bond-buying would end around March of next year. Fed Chair Jerome Powell will follow up the policy announcement with a press conference at 1:30 p.m. CST. Any way you want to slice it, many large Wall Street investors are coming to realize the Fed can no longer play around with “inflation,” and they have to send a clear market signal that they are willing to do whatever it takes to put out the fire.

Bulls want to hear reassurances that the central bank will remain somewhat flexible and willing to adjust its plan according to evolving economic data. But keep in mind, the latest bit of data, the Producer Price Index for November, came in hotter than expected yesterday at +9.6%, with the monthly pace of gains nearly doubling from October.

Covid influence

Likewise, consumer prices are at a 40-year high of +6.8%, more than triple the Fed’s target rate. While most economists, including most Federal Reserve officials, agree that inflation should no longer be considered “transitory,” anxieties about the central bank moving too far, too fast have been intensifying amid surging Covid cases. The wave currently sweeping the U.S. is being driven by the Delta variant, but Omicron variant cases have increased 7-fold in just the last three weeks. Moreover, there are increasing economic concerns with Omicron thought to be as much as 4-times more transmissible.

I should mention, it has been exactly one year since the first Americans received their first Covid vaccination. Today as a nation, Americans are just a little over +64% fully vaccinated.

Reports are circulating that several large Chinese manufacturing companies have recently shut down operations in Zhejiang, one of China’s biggest manufacturing areas, because of new virus cases. This is undoubtedly something the market will be watching closely in the days and weeks ahead.

In addition to the Fed’s announcement, investors today will also be digesting a slew of other key data, including Retail Sales, Import/Export Prices, Business Inventories, the NAHB Housing Market Index, and Empire State Manufacturing. I should also mention that Russian President Vladimir Putin and Chinese President Xi Jinping have scheduled a video call and discuss energy and various trade agreements. Some say China will soon be approving Russia as a supplier of grain and other natural resources and raw materials. Russia and China appear to be getting a bit closer, which will undoubtedly make some of the macro geopolitical investors more nervous. Stay tuned…

Fed In Focus After Inflation Hits 40-Year High – What’s Next?

This is now the sixth month in a row that has seen a significant jump in inflation – prompting the Fed to finally admit that they no longer view inflation as “transitory”.

Traders were always unconvinced by the central bank’s characterization of “inflation as transitory” and viewed it a major policy mistake. This is likely to be remembered as the worst inflation call in the history of the Federal Reserve.

November’s Inflation data has presented the Fed with its biggest dilemma ever on whether to stick with the current plan of concluding its quantitative easing program by July 2022 or moving much quicker, which would also pave the way to raise rates from near zero much sooner. That debate is expected to happen at the central bank’s FOMC policymaking meeting this week on December 14-15.

Other major market-moving events that traders will not want to miss out on include; the highly anticipated interest rates decision from the European Central Bank, U.S Producer Price Inflation figures and new developments around the rapidly spreading Omicron variant.

Where are prices heading next? Watch The Commodity Report now, for my latest price forecasts and predictions:

For a look at all of today’s economic events, check out our economic calendar.

Financial Sector May Rally 11% – 15% Higher Before End Of January 2022

The US Federal Reserve is keeping interest rates low. At the same time, the US consumer continues to drive home purchases and holiday shopping. Strong economic data should drive Q4 results for the financial sector close to levels we saw in Q3:2021. If that happens, we may see a robust rally in the US Financial sector over the next 45 to 60+ days.

The strength of the recent rally in the US major indexes shows just how powerful the bullish trend bias is right now. Some traders focus on the downside risks associated with the US Federal Reserve actions and/or the concerns related to inflation and global markets. I, however, continue to focus on the strength in the US major indexes and various sector trends that show real opportunities for profits.

Comparing Sector Strength

The following two US market sector charts highlight the performance over the last 12 vs. 24 months. I want readers to pay attention to how flat the Financial Sector has stayed since just before the 2020 COVID event and how the Financial Sector has started to trend higher over the past 12 months. This is because the shock of COVID briefly disrupted consumer activity. Yet, consumers are coming back strong, driving retail sales, home sales, and the continued strong US economic data. Therefore, it makes sense that the Financial sector should continue to show firm revenue and earnings growth while the US consumer is active and spending.

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Over the past two years, Discretionary, Technology, and Materials drove market growth compared to other sectors. Remember, the initial COVID virus event disrupted market sector trends over the last 24+ months.

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(Source: StockChart.com)

Taking a look at this 1 Year US Market Sector chart shows how various sectors have rebounded and how the Discretionary and Materials sectors have flattened/weakened.

Pay attention to how the Energy and Real Estate sectors have been over the past 12 months. Also, pay attention to how the Financial sector is strengthening.

I believe that the continued deflation/deleveraging that is taking place throughout most of the world will continue to drive global central banks to stay relatively neutral regarding rising interest rates. This will likely prompt an easy money policy throughout most of 2022 and drive continued revenues/earnings for sectors associated with consumers’ engagement with the economy.

If inflation weakens into 2022 while wage and jobs data stays strong, we may see more moderate strength in the Financial, Healthcare, Discretionary, and Technology sectors over the next 6 to 12+ months.

Read more about Global Deleveraging Here: Delivering Covid Bubble Possible Volatility Risks In Foreign Markets

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(Source: StockChart.com)

Financials May Pop 11% Or More Over The Next 6+ Months

This Weekly IYG, IShares US Financial Service ETF, highlights the recent sideways price trend in the Financial sector and the potential for a 9% to 13% rally that may take place as the markets shift into focus for the Q4:2021 earnings. Yes, inflation is still a concern, but as long as the US consumer continues spending and engaging in the economy, the Financial Services and US Banks should show strong returns.

If the US markets rally into the end of 2021, possibly reaching new all-time highs again, this trend may carry well into 2022 and drive Q4:2021 and Q1:2022 revenues and earnings for the Financial sector even higher.

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This Weekly XLF chart shows a very similar setup to IYG. I firmly believe the recent fear in the markets related to the US Federal Reserve, the new COVID variants, and the global markets deleveraging process is missing one critical component – the strength of the US markets and the strength of the US Dollar.

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As the rest of the world struggles to find support and economic strength, the US markets continue to rebound on the strength of the US consumer, the recovering economy, and the growth of these sectors. As long as the US Federal Reserve does not disrupt this trend, I believe Q1:2022 could be much more robust than many people consider. I also think the deflation/deleveraging process will work to take the pressures away from recent inflation trends.

What could this mean for 2022?

Early 2022 may well work as a “rebalancing” process for the global markets – possibly taking the pressures away from the strength in energy, commodities, and staple products/materials. This means pricing pressures will decrease while consumers are still earning and spending. The Financial sector should benefit from these trends over the next 6+ months.

Watch for the Financials to start to increase throughout the end of 2021 and into early 2022. There are many ways to consider trading this move, but ideally, I think the rally will take place before the end of February 2022.

Q1 is usually relatively strong, so that this trend may last well into April/May 2022. It all depends on what happens that could disrupt the current market sector trends. If nothing happens to disrupt the strength of the US Dollar and the strength of the US markets, then I believe the Financial Sector has a very strong opportunity for at least 10% to 11% growth.

Want to learn more about the potential for a financial sector rally?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio.

Have a great day!

Chris Vermeulen
Chief Market Strategist