Will 2022 Be A Growth Or Value Year?

The stock averages reversed into the close Friday as the selling picked up in the last hour. There was also last hour selling on Thursday but the losses were minor and did not change what in many cases was a giant year for stocks. In just three years the S&P 500 had a total return of over 100% and it was the best December performance since 2010.

All the markets ended the week higher but as we end 2021 the focus should be on the year-to-date (YTD) returns. The Dow Jones Transportation Average was the big winner up 31.8% as it added 1.8% last week. Two of the major averages, the S&P 500 and the Nasdaq 100 Index were not far behind with gains of 26.9% and 26.6% respectively.

The Dow Jones Industrials lagged the S&P as it was only up 18.7% while the small-cap iShares Russell 2000 was up just 14.5%. The Dow Jones Utility Average was by far the strongest in December up 9.8% and finished up 13.4% YTD after lagging the other market averages for much of the year.

Some are warning that after such a strong monthly gain and another year of strong gains January could be a rough month. Interestingly, in their last survey of the year the bullish %, according to the American Association of Individual Investors, rose over eight points to 37.7%. That is still below the April 8^th reading of 56.9% (point 1) but up from the September low of 22.4% (point 2).

The National Association of Active Investment Managers Equity Exposure Index was over 100% in October and November but dropped to a low of 52.2 on December 15^th (point 3). It rose last week to 85.7. In the latest Bank of America survey of fund managers they had the largest cash position since May 2020 as they were concerned over central bank tightening and Covid 19.

As pointed out by the analysis from Charles Schwab, despite the impressive yearly gains, 92% of the S&P stocks fell at least 10% during the year with “an average drop of 18%”. The data for the Nasdaq Composite and Russell 2000 is even more surprising. It is consistent with my analysis of the New High and New Low data.

On the NYSE last week there were 2331 advancing issues and 1220 declining issues. The data for last Friday was also positive even though many averages were lower for the day. All of the weekly Advance/Decline lines, except that for the Russell 2000, are positive.

The Invesco QQQ Trust (QQQ) QQQ formed a weekly doji last week (point 1) as the open, low, and closing levels were all near each other. If the distance from the close to the high was larger it would better fit the definition of a gravestone doji. In any case, it is not a sign of strength and does allow for a drop to the strongly rising 20 week EMA at $382.05. The weekly starc- band is much lower at $361.

The Nasdaq 100 Advance/Decline line is above its rising WMA but slightly below its November high. There is further A/D line support at line 2. Significantly, the relative performance (RS) which is a ratio of the QQQ to the S&P 500, has turned down from its flat WMA (point 3). This is a sign that QQQ is currently acting weaker than the S&P 500.

For the past year, I have often shared my analysis of the ratio of the S&P Growth Index (IGX) and the S&P Value Index (IVX). The ratio has been moving higher and favoring growth since 2009. The monthly chart shows a breakout of the trading channel in 2020 and higher highs in November, line a. In December the ratio was lower as the $IGX was up 2.4% while the $IVX was up 6.8%.

The MACDs peaked in October 2020 and have turned lower after forming lower highs, line b. The MACD-His shows a similar bearish or negative divergence, line c. It would take a decline below the 2021 low in the MACD-His to indicate that a major top has been completed.

Rising yields are typically more favorable for value stocks than growth stocks. In December the yield on the 10 Year T-Note was higher rising to 1.512% from 1.443% in November. The first barrier on the upside is the former uptrend, line b, in the 1.600% area that was broken in late November. A strong close above the resistance going back to May, line a, would get the market’s attention. Conversely, a decline below 1.344%, line c, would project even lower yields.

The daily MACDs have turned higher and broken their downtrend, line d. A move above the late November highs will increase the odds of a move higher in yields.

The increased volatility that began in December is likely to continue into January and the data on Covid-19 is likely to get worse before it gets better. In the December scan of S&P 500 stocks, there were over 50 new buy signals but still, the entry point and the risk should be the key consideration for any new purchases as we head into the New Year.