Equities Q1 2022 Fundamental and Technical Forecasts

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Equities Q1 2022 Fundamental Forecast: Fed Policy is a Bigger Threat to Equities Than Omicron

Another robust quarter for US equity markets and as we had highlighted in our Q4 forecast, the path of least resistance in the equity space was higher (SPX +5% in Q4, +20% YTD). As we close out the year, risks surrounding Fed policy have increased amid Washington’s concerns over inflation, which in turn has prompted the Fed to taper asset purchases at a quicker pace and project three rate hikes in 2022.

Alongside this, with Fed Chair Powell also retiring “transitory”, the hawkish move is somewhat reminiscent of the Fed’s 2018 pivot when Fed Officials stated that the balance sheet unwind was on autopilot. It took a turbulent year-end for equity markets to prompt the Fed to reassess their autopilot view.

My view remains that the biggest risk to equities is Fed policy over Omicron concerns. Keep in mind, that while the Omicron variant is more transmissible, data has so far shown symptoms are reportedly less severe than the Delta variant. What’s more, the economic impact of each variant has diminished with economies better able to operate with social restrictions.

FIGURE 1. FED 2018 HAWKISH PIVOT

Source: Refinitiv

FIGURE 2. FED 2021 HAWKISH PIVOT

Source: Refinitiv

That being said, while the concern going forward will be a move to tighter Fed policy, it's important to remember that during the first half of the year, stimulus will be at its strongest. Therefore, the bias for equities is likely to remain in buy the dip mode, with a return to a fresh record high.

S&P 500 CHART: 100DMA PREVENTING STEEP PULLBACKS

Source: Refinitiv

 

By Justin McQueen, Strategist, 25th December 2021. DailyFX

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Equities Q1 2022 Technical Forecast: Stock Trends Are Pointed Higher Until They Aren’t

The U.S. stock market, and most of the world for that matter, remains pointed higher until it indicates otherwise through price action that suggests a broad correction or worse is unfolding. For the S&P 500, a decline below 4495 would be noteworthy as it would be the first lower-low we have seen in some time.

It may just mean a corrective pattern is forming that won’t last long, but it would certainly be worth monitoring closely for bear market conditions to extend. The 200-day moving average would be the next big level to watch if support breaks, it currently resides around 4370 (and rising).

On the top-side, should we see no break in support levels and the trend remain status quo, then new record territory would bring no resistance to speak of. We would need to monitor momentum and price action for cues as to when another meaningful high may develop on the market’s own weight. Should the market traverse in record territory, traders will want to be cautious on chasing as the market has a tendency to reverse prior weeks gains at new highs before resuming. The bottom line is buying the dip tends to yield better results than chasing momentum.

S&P 500 WEEKLY CHART

Chart created with TradingView

DAX

It is possible the DAX is working on a broadening top, a pattern marked by higher-highs coupled with flat bottom lows. If this pattern were to come to roost it could be significant as it has been under development since April. To validate the pattern a decline below 14818 is needed. In the event it does trigger, the next major level to watch is the high prior to the pandemic set at 13795.

Bearish patterns, though, in the ongoing bull market have not been very reliable. And on that, we may not see the broadening top trigger. If we see a bid maintain and U.S. equities (the leader) continue to be neutral to strong, then the DAX is likely to follow suit to some degree. If we see a rally to new record highs beyond 16290, keep an eye on the top of the broadening top pattern as it could put in yet another peak to concern ourselves with.

DAX WEEKLY CHART

Chart created with TradingView

NIKKEI 225

The Nikkei was been stuck in idle for all of 2021. It is in the process of creating a range that may extend well into or through the first quarter of 2022. On the downside the bottom of the range is 26954, viewed as the first truly meaningful level of support. A break below could set off a large move lower as it may prove a major top had formed in 2021. On the top-side, there is minor intra-range resistance at 29960, but the real concern is the high at 30795. A break of this level is needed to extend the bull market.

By Paul Robison, Strategist, 26th December 2021. DailyFX