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After a stellar 2021 for equity markets, consensus seems to believe that stocks will continue going higher in 2022. At the very least, the narrative sees the strong momentum in play as the past trading year wound down to be a key catalyst for additional gains into the new year.
One thing for sure, any tailwinds boosting the major US indices into 2022—including the S&P 500's 27% jump during 2021—could easily be offset by negative headlines from this coming Wednesday's FOMC Minutes release, as well as Friday's Nonfarm Payrolls report.
Analysts also expect that defensive sectors are ripe for profit-taking after substantial gains in December.
We have no argument with that. However, there's no indication from market pundits regarding which sectors will then be taking the lead. Will the cyclical rotation, which pushed value shares higher, resume? Or will technology stocks dominate upcoming rallies?
All things being equal, and as we've pointed out numerous times during 2021, economically sensitive sectors outperform during economic accelerations, whereas growth stocks reign the rest of the time.
Still, there's an array of conflicting views: one version favors Technology stocks in tandem with equities from the Financial Services segment; another portrayal likes Financials and Industrials. The former pairing represents two growth sectors while the latter are two cyclicals. To us, either version sounds like a hedged response, or if we were being less diplomatic, a lack of opinion.
Though we're not in the fortune-telling business, we're going to use some statistics to establish what would be, at the very least, an educated opinion. To clarify, the below are not 'forecasts,' nor prophecies. Rather, we're just betting on the odds.
We've analyzed all 11 sectors in the S&P 500 in an attempt to form an actual opinion. And here's how we think the sector rotation will next play out based on the technical signals right now:
Communication Services Select Sector SPDR® Fund (NYSE:XLC): confirmed H&S top – Bearish
Technology Select Sector SPDR® Fund (NYSE:XLK): Broadening Formation – Bearish
Financial Select Sector SPDR® Fund (NYSE:XLF) is trading within a rising channel, supported by the 200 DMA – Bullish
Industrial Select Sector SPDR® Fund (NYSE:XLI) closed at the highest levels since Nov. 24, 1.24% below its Nov. 16 record – Bullish
Materials Select Sector SPDR® Fund (NYSE:XLB) posted a record on Friday – Bullish
Consumer Discretionary Select Sector SPDR® Fund (NYSE:XLY) is ripe for a short-term dip after completing a falling wedge, bullish within an uptrend – Bullish.
Energy shares were the big winners in 2021. However, currently, the Energy Select Sector SPDR® Fund (NYSE:XLE) is trading within a short-term falling channel. The sector may find support at the top of a failed H&S top, with the June highs forming the head and the uptrend line since the October lows. As such, the outlook remains – Uncertain
We think economically sensitive sectors are much more likely to outperform versus technology stocks.
However, as we noted above, the popular narrative expects defensive shares to pull back. Still, the current technical evidence shows this segment is more likely to continue to gain, presumably at the expense of technology stocks, along with value shares.
And of course, note that all defensive sectors—Consumer Staples, Healthcare, Real Estate and Utilities—just hit new records.
Consumer Staples Select Sector SPDR® Fund (NYSE:XLP) scored a double record, both on a closing and intraday high basis – Bullish
Healthcare Select Sector SPDR® Fund (NYSE:XLV) closed lower than Thursday's double record and almost formed an Evening Star. We still see it as – Primarily Bullish
Real Estate Select Sector SPDR Fund (NYSE:XLRE) achieved a double record, with the highest closing as well as highest intraday prices. However, it also formed a shooting star, which is bearish but only short-term, therefore it's still – Bullish
Utilities Select Sector SPDR® Fund (NYSE:XLU) registered a double record on both an intraday high and closing basis. That's – Bullish
Treasuries, including the benchmark 10-year note, can provide some confirmation regarding stocks since yields possess a positive correlation with equities.
Rates last week blew out a bearish symmetrical triangle, which we expect will confirm a double top. If yields continue higher, it will be bullish for stocks. Our one concern is that the bearish pattern's failure occurred during holiday-thin trading. So, we'll be monitoring the path of Treasuries this coming week and maybe next, to see whether traders, returning from vacation, agree with the moves.
The same failure of a bullish pattern could occur for the dollar.
The USD's bullish triangle crumbled when supply overcame demand. Again, it's difficult to know if those trades, amid thin volume, actually represent the trend. We hope to find out in the upcoming week.
Gold finally completed a rounding bottom, even based on the most conservative interpretation.
The yellow metal's next point of resistance will be at around $1,850, the top of a giant descending triangle.
Bitcoin fell below the 200 DMA, trading within the left shoulder of an H&S top, with far-reaching implications.
Oil dropped hard on Friday but still remained above $75, a critical psychological level.
The case for WTI is difficult at the moment. The price found resistance at the top of a bearish wedge, also the right shoulder of a large H&S top.
All times listed are EST
3:55: Germany – Manufacturing PMI: seen to remain flat at 57.9.
20:45: China – Caixin Manufacturing PMI: forecast to rise 50.0 from 49.0, the cutoff between growth and contraction.
3:55: Germany – Unemployment Change: expected to surge to -15K from -34K.
4:30: UK – Manufacturing PMI: likely to remain unchanged at 57.6.
10:00: US – ISM Manufacturing PMI: to edge lower to 60.2 from 61.1.
10:00: US – JOLTs Job Openings: previously printed at 11.033M.
8:15: US – ADP Nonfarm Employment Change: seen to have fallen to 413K from 534K in December.
10:30: US – Crude Oil Inventories: predicted to rise to -3.143M from -3.576M.
Tentative: US – FOMC Meeting Minutes
4:30: UK – Services PMI: forecast to slide to 53.2 from 58.5.
8:30: US – Initial Jobless Claims: to jump to 208K from 198K.
10:00: US – ISM Non-Manufacturing PMI: predicted to drop to 66.8 from 69.1.
4:30: UK – Construction PMI: to edge down to 54.0 from 55.5.
5:00: Eurozone – CPI: expected to decline to 4.7% from 4.9% YoY
8:30: US – Nonfarm Payrolls: seen to jump to 400K from 210K.
8:30: US – Unemployment Rate: to fall to 4.1% from 4.2%.
8:30: Canada – Employment Change: to plummet to 27.5K from 153.7K.
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