January 24th, 2022. Capitulation Monday, one for history books. We will see one chart that shows how significant the damage was. This market is going through big rotation, and this comes with volatility, always. When is the pain in stocks going to end, and which sectors will get a bid? Although we believe this market is still moving in line with our 2022 forecasts (think lithium, cobalt, Dow Jones, gold and silver, crypto) we also don’t want to be biased. In this article we share a few notes about ongoing trends, and new trends we start seeing.
First, one chart that really stands out as it relates to Capitulation Monday.
The NYSE new highs minus new lows is shown on the first chart, on a monthly basis. Yes, January was horrible and pushed many stocks to new lows, many of them. In fact, it qualifies as the 3d most destructive month in the last 25 years. Although capitulation typically comes with a buy opportunity we also see on the second pane on below chart that the number of NYSE stocks below their 200 day moving average is not in extreme territory. This might imply that more selling is underway, maybe not immediately though.
Here is when selling in stocks will be over: whenever the Russell 2000, one of the leading stock market indicators, has reached its bearish target which we expect to be between 1716 and 1800 points. That’s ‘just’ 10 pct lower, considering that this index came down almost 21% (highs to last week’s lows). This may not happen immediately, it may take another 4 to 6 weeks.
In the meantime we see that capital is flowing out of tech and small cap stocks into several other areas of markets. As per the chartbook we shared in our Momentum Investing weekend update, featuring 70 charts and markets, we see that agricultural commodities are in strong uptrends. Latin America is printing a bullish reversal after it came down drastically last year. Some stock market sectors look good, yes in the U.S. It might be that financials in Europe are about to do well. Silver looks amazing, long term, but we did say this plenty of times. All of these sectors are on our watchlist, and we are including a selection of stocks in our shortlist in order to initiate positions in the strongest sectors whenever markets calm down.
