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Week Ahead: Stocks On Track For Year-End Rally; Gold Could Be Headed Higher

By Investing.com (Pinchas Cohen/Investing.com)Market OverviewDec 26, 2021 07:18AM ET
www.investing.com/analysis/week-ahead-stocks-on-track-for-yearend-rally-gold-could-be-headed-higher-200612706
Week Ahead: Stocks On Track For Year-End Rally; Gold Could Be Headed Higher
By Investing.com (Pinchas Cohen/Investing.com)   |  Dec 26, 2021 07:18AM ET
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  • A rally during the last week of trading has history on its side
  • Investors seemed to accept hawkish Fed and Omicron spread last week, but that could change in the new year

Despite the Fed's hawkish tilt in December and the rapid, ongoing spread of COVID's latest variant, Omicron, possibly the most transmissible strain of the virus thus far, all four major US benchmarks—the S&P 500, Dow Jones, NASDAQ and Russell 2000—rose at the end of holiday-shortened trading on Thursday. As well, each index gained for the week, ahead of Friday's Christmas break, with the S&P 500 notching a new record to boot. 

Though markets are anticipating US Federal Reserve moves to continue tightening in 2022, with interest rate hikes up next, investors remain willing to increase risk. That bodes well for the possibility of a belated Santa Rally into the end of 2021 and perhaps beyond.

Calm Before Or After The Storm?

It's surprising that one of the most hawkish Fed moves in years appears to have received so little push-back or fanfare from markets. For years, we've been wondering how the central bank will extricate itself from the deep stimulus hole it's dug itself into. Indeed, before this, any talk of pulling back from easing triggered equity market tantrums. Yet now, when it's finally official, there's been barely a peep from investors.

We think that's awfully strange. It might be the recent moves higher are the result of thin volume with institutional traders already on holiday and just an array of retail investors actively participating. That could be the same scenario during the coming week.

Which makes us wonder: was the recent market turbulence the storm before the quiet, or will the week ahead be the quiet before the storm? We can't know, of course, but in our view there's still another shoe getting ready to drop.

In addition, the news about the latest virus variant seems to be abating. Still, the alarming rate of contagion should be, well, alarming. Even if the percentage of severe cases from Omicron is significantly lower than those from the Delta strain, the much higher infection rate could increase the total number of severe cases anyway.

The new variant could be a leading indicator for another scenario some health officials have warned about—a virus that continues to spin out new variants without ever being fully contained. Notwithstanding, the FDA's approval of oral COVID therapies from Pfizer (NYSE:PFE) and Merck (NYSE:MRK) gives investors hope. 

As for the potential for an equity rally in the coming week: between Christmas and the New Year holiday since 1928, the S&P 500 rose almost 79% of the time, gaining an average of roughly of 1.7%.

Furthermore, the broad benchmark is about +25% year-to-date, and Santa Claus rallies tended to be more assertive with momentum as a tailwind. That set up is also identifiable on the SPX technical chart.

SPX Daily
SPX Daily

The S&P has been developing an H&S continuation pattern. The MACD and RSI signal that the price and momentum are primed for a breakout to record highs.

One notable fundamental theme that could give stocks that push is a breakthrough on US President Joe Biden's $1.75 trillion Build Back Better climate and social spending bill. Stocks plunged when West Virginia Senator Joe Manchin pulled his support at the last minute, leaving the bill short one necessary vote for passage.

Though we often look to Treasuries for clues regarding risk appetite and investor sentiment about the economy, yields have not been sending out clear enough signals from our perspective.

UST10Y Daily
UST10Y Daily

Rates, including for the 10-year note, have just climbed back above the 200 DMA, which has possibly been assuming the role of neckline to a top (H&S, double top?). However, we're not yet ready to call it a failed top, as rates found resistance by what appears to be an emerging symmetrical triangle.

This tends to be a continuation pattern and coming from the top, it increases the odds of a breakout. If that happens, it means investors are moving capital back into safe havens, a negative omen for stocks.

The US dollar tends to correlate positively with rates. The USD is also waiting for resolution amid disruption within the uptrend.

Dollar Daily
Dollar Daily

At first, we thought that a shorter-term pennant might turn into an ascending triangle. This would be considered bullish, indicating buyers are willing to up the ante. At the same time, sellers are less enthusiastic, selling only at the same high levels.

Note that bulls are using this pattern as a springboard to increase the momentum of the greenback, sending it into a steeper rising channel.

Gold, like Treasury yields, has been playing tricks on us. Both, after all, are considered safe havens. But conditions have been changing, and so have our views on the precious metal.

Gold Weekly
Gold Weekly

It now appears that market forces are gearing up to send the yellow metal higher. Gold may be developing an H&S continuation pattern (or symmetrical triangle, with the same implications). Penetration of the $1,900 level will suggest a challenge to the August 2020 record.

Bitcoin was little changed over the weekend, after rising on Thursday to its highest price since Dec. 3. There's been a lot of talk recently about 'buying the dip.' However, it should be pointed out that while the price of the cryptocurrency is below its November record, the value of the leading digital token has more than doubled in 12 months.

In that sense, its price is now sky-high. Also, Bitcoin's technical chart is alarming.

BTCUSD Weekly
BTCUSD Weekly

BTC/USD has been developing a rising wedge since the April peak. This pattern contains the spurned hopes of buyers after they gave it all they had but couldn't sustain the momentum.

The price isn't going any higher. It's now sitting between the April and November peaks. This pattern could also be the setup for a double top, whose neckline is at the $29,000 level. If that happens, we're looking at an implied target of near-$0.

Oil climbed for the third straight day ahead of the weekend, its longest winning streak since Dec. 8 and reached its highest point in a month. Technically, however, we're afraid the rally won't last.

Oil Weekly
Oil Weekly

The upmove stopped below the broken uptrend line since Apr. 27 and may have developed an upsloping H&S top.

The Week Ahead

All times listed are EST

Monday

Markets closed for Christmas in Australia, Canada, the UK and other locations.

Tuesday

10:00: US – CB Consumer Confidence: previous reading came in at 109.5.

Wednesday

10:00: US – Pending Home Sales: expected to plummet to 0.6% from 7.5%.

10:30: US – Crude Oil Inventories: last week's print showed a drawdown of -4.715M bbls.

Thursday

8:30: US – Initial Jobless Claims: seen to remain steady at 205K.

20:00: China – Manufacturing PMI: predicted to retreat to 49.6 from 50.1

Friday

New Year's Holiday; markets closed in Brazil, Japan, Singapore, Russia, Germany, Switzerland and the UK among others.

Week Ahead: Stocks On Track For Year-End Rally; Gold Could Be Headed Higher
 

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Week Ahead: Stocks On Track For Year-End Rally; Gold Could Be Headed Higher

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Comments (12)
Ventzislav Koptchev
Ventzislav Koptchev Dec 27, 2021 5:39AM ET
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BTC going down to 0 would be quite a shocker. Any theory that predicts a measurable probability of that happening within a year is seriously flawed imo. Never believed in technical analysis, and such predictions put me away further.
Koketso Motshweni
Koketso Motshweni Dec 27, 2021 5:04AM ET
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will it be buying or selling ?
Bay Creek History Detectives
Bay Creek History Detectives Dec 27, 2021 12:10AM ET
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Thank you.
Pinchas Cohen
Pinchas Cohen Dec 27, 2021 12:10AM ET
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Welcome
Amie Inconnue
Amie Inconnue Dec 26, 2021 11:45PM ET
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Thank you, Pinchas! I don't write comments too often, but I'm reading most of your articles and keep learning. Thank you for your work!
Pinchas Cohen
Pinchas Cohen Dec 26, 2021 11:45PM ET
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I appreciate it, Amie. Happy learning!
Adam Paine
Adam Paine Dec 26, 2021 9:51PM ET
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better polish this ********up before the markets open! only green days ahead!!!! forever
Mohd Izhar Muslim
Mohd Izhar Muslim Dec 26, 2021 7:15PM ET
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Thank you for the article 👍
kufre solomon
kufre solomon Dec 26, 2021 1:30PM ET
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plz coin can I buy for tomorrow? am new here...
Dec 26, 2021 12:23PM ET
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Market bullish trebd resume now
Peter ONeill
Peter ONeill Dec 26, 2021 12:23PM ET
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The market has been 'rallying' nonstop for 20+ months. It has EVERY hallmark of being in a bubble. That's what happens when you print $7+ Trillion in debt and yet don't expect inflation hahahaha. End result???? Nasdaq is up 80%, S&P is up 50% and Dow is up 25% despite GDP projected to only return to pre covid levels next year and then growing by 3.8% in 2022 and 2% in 2023 (...what has grown to create an artificial market is US National Debt by 35% in 20 months).  US Corporate debt is at its highest level since the 1980s, US National Debt hasn't been this high since WW2, Inflation at its highest level since the early 1980s. Plus almost every company is trading about 35%-40% above their long-term PE Ratio average. Can see the Bubble grow for the next 12-18 months as people hide cash from inflation..but then get ready for a bubble crash perhaps worse than the dot.com crash or 2008 crash...
Vigneswaran Sivasubramaniyam
Vignesh1402 Dec 26, 2021 11:08AM ET
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thank you
Tobby Olumba
Tobby Olumba Dec 26, 2021 9:11AM ET
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Thank you very much for the info.
John Tichy
John Tichy Dec 26, 2021 9:11AM ET
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Did this guy write for Business Week magazine? I cancelled my subscription to that publication years ago when they touted their accuracy because they would write their world market predictions and how it will rise.....or fall. And guess what? they were right 100% of the time. the markets would rise......or fall! show us your knowledge and expertise, take a position and stand by it. it's useless banter to read that something will happen......or not.
Pinchas Cohen
Pinchas Cohen Dec 26, 2021 9:11AM ET
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John Tichy  You don't understand what market analysis is. It's analysis. Not fortune telling. You should also read again what I said. Slower this time. I did take positions.
John Tichy
John Tichy Dec 26, 2021 9:11AM ET
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"At first, we thought that a shorter-term pennant might turn into an ascending triangle. This would be considered bullish, indicating buyers are willing to up the ante. At the same time, sellers are less enthusiastic, selling only at the same high levels." eeeeyeah, what I said. congratulations, you are correct....either way.
 
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