April 2022 Market Update Bear Volatile Market Type By, RJ Hixson

Part I: The Big Picture

Here are some of the primary elements for the big picture right now:

  • The yield curve has inverted in certain maturity combinations already, with a definitive inversion likely coming.
  • The inflation rate is higher in the US than it has been in decades and has a higher forecast number than other developed countries. (Have you heard the word “transitory” combined with “inflation” lately?)
  • Interest rates are still very low compared to recent decades; however, they have been rising and will continue to rise. The Fed just communicated a faster pace of rate hikes for the remainder of the year.
  • Oil is in the range of $100 a barrel.
  • A war is going on between the world’s largest and fifth-largest grain exporters at the start of this growing season.
  • The Covid pandemic continues which has effects on the general population’s psychology, production, transportation (especially China at the moment), travel, and health care systems.

Let’s see what the numbers, charts, and tables tell us about March.

Part II: The Current Stock Market Type Is Bear Volatile

If you were to blow up the S&P chart below and look at it from across the room, what would you likely see?

The rise from earlier in 2021 seems to be over and price now looks like it is in a sideways range since last spring. In addition, you might notice the size of the bars and wicks are much bigger in the last few months than they were last year.

System Quality Number® Report

We monitor the Market SQN® for timeframes from 5 weekly bars to 40 weekly bars. Here’s the directional component for those ranges:

  • 200 days – Sideways
  • 100 days – Bear (this is the period used to label the market type)
  • 50 days – Sideways
  • 25 days – Bull

Given the dips and bumps in the price chart, you may be able to see those directions by going back 5 bars, 10 bars, 20 bars and 40 bars from the closing bar.

The decrease in the slope of the price line and the increase in volatility are expressed in the Market SQN® chart below. The Bull and Strong Bull market types from early/mid-2021 transitioned through a short sideways market type to then spend a good part of the first quarter in the Bear zone.

Remember the bigger price bars and wicks recently from the price chart above? The chart below isolates volatility and graphs the S&P’s 14-day ATR%. The decline in volatility in the last two weeks of March is noticeable but the market type still sits in the Volatile category

All four major US equity indices were down for the first quarter. The Dow and S&P are down 4-5% with the Russell and Nasdaq being down in the 7-9% range. Hopefully, your trading performance is better than those numbers and in the positive range. If you understand the idea of designing trading systems for each market type, you are probably finding that your sideways and bear market type trading systems are finding plenty of profitable opportunities.

Part III: Our Four-Star Inflation-Deflation Model

We don’t have the model’s historical table this month but it has shown consistent (persistent?) inflation for the last year. Here is the scoring table at the close for the month of March.

Regardless of whether you use gold or Bitcoin for your model scores, the model clearly shows a very strong inflation score.

Part IV: Tracking the Dollar

USD has been going up fairly steadily since the end of May 2021 and closed in March at $98.36. USD was rangebound for the month mostly between $97 and $99. Even with US inflation, the dollar appears to be gaining value relative to other currencies.

Part V: World Market Model

Equity markets across Asia, Europe, Africa, and the US are mostly brown and red indicating declines and volatility for the last 100 trading days. The exception is in the Americas (i.e., US, Canada, Central and South American) equity markets are mildly strong or at least weakly positive. What is going on there vs the rest of the world?

Currencies look uniformly weak against the US Dollar still, which has a major effect on the rest of the model’s scores.

Equity sectors have a lot of red-colored ETFs but there’s actually a mix of colors – or sector performance. The green-colored sectors look to be resource and energy-related.

Commodities, with the exception of silver and water, are all positive with several green symbols. Interest rate instruments are uniformly red. The model measures price, which falls for bonds when rates rise. The remaining two real estate ETFs are now brown – related to the rise in interest rates?

Study briefly the top list and bottom list below. Hard to miss the theme – money is flowing out of paper and into stuff – necessary stuff.

There’s quite a differential between the high scores and the low scores this month. Van’s World Market Model both rewards and punishes the muni symbols somewhat unfairly compared with the rest of the database. Most of the time, volatility is so low in this group that they are not attractive trading instruments for individual traders. In the March 2020 lockdown crash and since January of this year, the “big” declines in munis generated some really, really low Market SQN scores. While the Market SQN scores are amazingly low, the “big” recent drop in this group is on the order of 5%. That’s huge for munis but it won’t take the breath away from traders in equities, Futures, or Forex.

This month, the World Market Model has 10% of its database with bullish scores, 15% with sideways scores, and 75% with bearish scores. That’s pretty lopsided and you can probably take a good guess about the types of symbols in the minority bullish category.

Conclusion

This update does not try to forecast market moves but rather attempts to seek a better understanding of where the markets are right now and the primary factors affecting them.

With that understanding, you can then think probabilistically about the coming periods and which markets or sectors might be attractive to trade. This assumes you integrate a big picture process with market selection and trading systems designed by market type. If that’s the case, all of the red and bearishness in the information above doesn’t mean you are losing money but simply drives what you trade and how you trade—it’s all just part of your process. I hope that’s the case for you—that’s part of what we help traders do.

P.S. If you would like to learn to take advantage of Sideways and Bear markets consider our home study workshops. Learn more here.

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
Scroll to Top