Phases & Cycles Market Outlook – December 20, 2021
N.B. The main part of this Market Comment was written on Dec. 16th. The OUTLOOK was added on Dec. 20th at 1:30 p.m.
A dip and a reversal and the markets are almost back to where it all started on November 22nd.
Our Market Comment #524 (“Looking ahead to December”) forecasted a decline, and suggested “a 4.5% decline to 4550- 4500 and a similar decline to 20,500 in Toronto towards mid-month”. The decline started much sooner, but the range of the decline occurred almost exactly as we predicted.
From the late-November high to the December 3rd low the S&P 500 (SPX) lost 5.3% to 4495, the Dow Industrials (DOW) fell 7.0% to 34,007 and the NASDAQ declined 7.9% to 14,931. During the same time, the VIX rose 84.3%, the biggest rise since January.
Among the FAANG stocks Facebook and Netflix lead the way down, but Apple gained.
The decline was blamed on the emergence of a new virus, but portfolio managers with large gains probably contributed to the drop, trying to sell “before the drop gets any worse”!
Then, from the December 3rd low the SPX recovered to 4714, the DOW to 35,983 and the NASDAQ to 15,793. The DOW and the NASDAQ gained 5.8%, compared to SPX at 4.9%.
Using the statistics, we get another lesson about the usefulness of watching the VIX during a sell-off.
While the SPX was rising from Nov. 22nd to 24th and the VIX hardly moved, the ratio between the Advancing Issues (ADV) vs. the Declining Issues (DEC) and the 52- week Highs vs. the 52-week Lows turn negative, heralding a decline. As expected, the SPX fell nearly 107 points next day (Nov. 26th), the VIX had a huge jump and the negative ratio increased by ADV-DEC (1/6) and by the Highs-Lows (1/12.5). The SPX oscillated during the next days, and on Dec. 1st the VIX reached a high of 31.12. December 7th brought a major change: the ADV/DEC and the Highs/Lows turned positive and the VIX declined to 21.89. This two day VIX decline gave the signal that the selloff was over and buying should proceed.
TORONTO
Toronto (TSX) began its decline from 21,773 on November 12th, earlier than the SPX, and declined 6.1% to 20,465 by December 1st. It rose a measly 3.7% to 21,227 by December 7th, but had not made any further gains thereafter due to the lack of recoveries in the Consumer Discretionary (Corus, Linamar, Magna, Quebecor), Financials (CIBC, Laurentian, National Banks, CI and IGM Financials), Industrial (CAE, Finning, SNC) and had no help from Materials (Cascade, Intertape, Methanex, and the Golds).
OUTLOOK
As the charts below indicate (written on Dec. 20th 1:30 p.m.) the SPX is declining towards its level of Dec. 3rd (4500, B-C), yet the VIX (25.25) is significantly lower today compared with Dec. 3rd (30.67, B-C). This is referred to as a “Positive Divergence”.
Both SPX and TSX are in a major bullish phase. Minor corrections are natural events (see October - A), whether they are due to interest rate changes, Covids, Omicrons, or whatever the bears use to scare investors into selling their good positions.
PAC-20-198; MKT-501; December 20, 2021
Ron Meisels
Phases & Cycles Inc., 4000 Boul. De Maisonneuve West, Suite 2010, Montreal, QC, H3Z 1J9
Tel.: (514) 393-3653. E-mail: RonMeisels@phases-cycles.com
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