Part I: The World Market Model
Happy New Year!
Let’s see how the markets were feeling on the last trading day of 2022.
We see very little green but lots of yellow and brown in the model on December 30th. Hmmm, not much happy in the holidays for the bulls this year end. Here are some highlights from the model.
- The US market segments are almost all negative again. Tech (QQQ) is red, the Dow (DIA) is slightly positive, but everything else is weakly negative.
- The geographic region Europe/Africa is the strongest in the world, although it’s only mildly positive on a 100-day basis. Nigeria (NGE) is the only red country market and remains very weak, like last month.
- Energy-related symbols are the only green in the sectors view. There’s lots of yellow and brown with a few red. The volatility ETF (VXX) is the weakest symbol, which is interesting given that the market moved back to a Volatile type in December.
- The most talked about sectors are mostly red and I’m not sure how much people are talking about them presently. Hemp (HMLSF) is green but the score does not reflect the sideways/bearish price chart. Most of the other marijuana-related symbols are also quite bearish. (We’ll have to investigate this.)
- Currencies are a mix of yellow, brown, and red. UUP, the USD bullish ETF, stays negative but the crypto ETF, GLDC, is the weakest symbol on the table.
- There’s no green in Asia countries this month and Taiwan (EWT) has the weakest position.
- American markets outside the US are brown and yellow.
Below, commodities range from silver’s green (SLV) to natural gas’s red (UNG)—mostly mild strength or mild weakness. All the real estate and bond symbols are brown or red. These asset classes are weak across the board given the prospect of continuing rising interest rates for the foreseeable future.
For the year end, Turkey (TUR) again sits atop the Top 15 list with a very strong Market SQN score— the only dark green symbol on the list. If you look at TUR’s price chart, you’ll see a nearly doubling in price over the last six months—strength amongst global weakness. As for the rest of the top list, about half are energy-related ETFs. So, energy related companies have very strong scores while the energy commodities ETFs (USO+UNG) remain weak. What might that say?
The bottom list shows the effect of rising interest rates and the crypto market implosion with lots of debt and crypto-related symbols populating the list. Every symbol on the list this month is red.
In October, 50% of the symbols in the database were in the Very Bearish category. In November, 49% were in the Sideways category. At the end of December, 45% are Bearish. Prices (and big money) are moving lots of symbols around a lot by month. You have often heard of a secular bull market or a secular bear market. Perhaps we are looking at a secular volatile market now.
Part II: The Big Picture
After reaching an all-time high on the first day of 2022, the S&P 500 fell in fits and starts for the rest of the year, reaching its low in mid-October on the 13th. After many years of typically hitting dozens of new all-time highs, the S&P not seeing another new all-time high for some time seems more likely than a new all-time high showing up soon.
Inflation was a primary concern through 2022 as were the interest rates hikes and concerns about a weakening economy. What are some of the big picture aspects at the moment?
- The weakening USD.
- The anticipated Fed rate hikes.
- China. After two years of a harsh zero-Covid policy, the policy was rescinded in December. Now, the Chinese economy enters an uncertain period. Will it recover quickly or will Covid spread rapidly among the population and hurt the economy?
- The risk of recession in the US, though it may have a non-traditional profile given the employment market.
Part III: The Current Stock Market Type is Bear Volatile
After a two-month recovery runup in October and November, the S&P declined each week in December which pushed back the market type into bearish territory. For the various periods we measure, all are bear again except for the 50 day period.
200 days – Bear (Bear last month)
100 days – Bear (Sideways last month)
50 days – Sideways (Sideways last month)
25 days – Bear (Bull last month)
The following chart shows the declining S&P 500 index for the year of 2022. The index did not close at the low for the year but is not far from it.
The Market SQN score spent the first half of December in sideways but fell back into bear mid-month. Most of 2022 was spent below the Market SQN zero line.
Volatility started the month in normal but midmonth, went back up into the volatile range. We’ll see what it does in January. Higher volatility correlates with bearish conditions.
The indexes earned negative annual numbers across the table below. The least negative number is -8.9% for the Dow while the weakest by more than ten percentage points is the NASDAQ at -33%. The S&P and Russell were both down about 20%.
Part IV: Van’s Four-Star Inflation-Deflation Model
Every model component registered deflationary scores for November. Let’s see what the model says this month.
So, not so deflationary in December. Using Van’s old model, inflationary forces balanced deflationary forces in December for a score of zero. If you add in BTC, as Van did for the last few years, we are looking at a deflationary month. But, nowhere near November’s strong score. Van was keen to notice the divergence between BTC and gold for a few years and wondered if the markets had replaced gold with BTC for the role of inflation protection. Perhaps it had – temporarily? Perhaps inflation wasn’t a factor in the crypto bull market but seems to be a factor for gold’s recent upward moves. What story do you tell yourself?
Part V: Tracking the Dollar
Since the USD index peaked in September, it has continued to fall through the end of the year— 11% off its high. In December, though, the rate of decline slowed considerably.
The recent drop looks pretty substantial on the daily chart but when you take a look at the monthly chart, you might realize it could be the start of a long-term decline or just a pullback from a strong runup. The market will let us know, in the coming months, the actual outcome.
Conclusion
2022 was a tough year for the bulls and the buy-and-hold crowd.
Did your portfolio beat the market (but lose less than index of choice) or did it make a gain for the year?
And looking ahead to 2023, are you anxious or fearful about what the markets are going to do? What’s your outlook? Where are the biggest opportunities and risks for the year? Which direction will it go? Bull, bear, or sideways? There’s so much to think about and try to figure out for traders! Those areas, however, might relate a lot less to the economy or markets and relate a lot more to you, personally.
Question: Can you imagine being really confident about 2023? Not about what the markets are going to do but about your success trading for the year, regardless of what the markets do. This kind of trader would probably possess a few of the following traits.
- You have effective strategies or systems for trading different market conditions.
- You understand how to develop and leverage position sizing strategies.
- You know who you are, why you are trading – at a very deep level – and your trading reflects that knowledge.
- You have a great plan.
- You execute your processes efficiently.
- You manage your mental states.
This kind of work needs to be initiated before you start trading and then needs to continue as you trade. The markets change and so do you. Trading is a complex activity and understanding how to approach the area can seem daunting.
To help clarify what’s required for trading success, we incorporated Van’s long-standing principles into the Trading Excellence Model.
Being able to trade well is not an event but a process—one that takes time, guidance, and lots of iteration. The Van Tharp Institute helps people who are committed to becoming successful in the markets. Prepare yourself properly so you can trade profitably, consistently, and confidently in 2023.
We wish you much success in 2023 – and beyond.