Today’s post will review our forecasts for equities, commodities, currencies and bonds for 2022 – where we were right and where we were wrong.  Spoiler alert: 2022 was an excellent year for technical analysis and chart patterns.

Note: If you just want to know what lies ahead, the 2023 forecast will be posted in the next week or so. If you want to know how we got to where we are, read on.

Macro

We laid out both the bull and bear cases on Jan 3, 2022 [see: The De Facto Shutdown] suggesting that central banks and governments could take action to reduce oil/gas prices and, therefore, inflation.  The bullish case was contingent on “the Fed [being] willing to take whatever steps are necessary in order to get inflation back down to 2-3% quickly.”

We were leery of this assumption however, noting that we “spent much of 2021 expecting them to take action to prevent the high levels of inflation we now have. They not only allowed inflation to rise above target, they continued to stoke it with an insane amount of stimulus and insisted it was transitory even after multiple categories spiked above 2% annually.”

Needless to say, the macro environment changed dramatically in February when Russia invaded Ukraine. All hopes for lower inflation were thoroughly dashed as oil/gas prices shot through the roof. [see: Putin’s Gift to the Fed.] This essentially locked central banks into an inflation-fighting stance, ensuring higher interest rates and eliminating the argument for higher equity prices.

 

Equities

We entered the year with a bearish bias and were rewarded relatively quickly. But, while nearly all of our downside price targets were reached, the subsequent bounces sometimes exceeded our upside targets. Timing was a bit of a challenge until our primary channels became clearer in February.

The downside targets we posted on Jan 3 (based on our belief the top was in at 4808.93 rather than the 4818.62 top reached the following day) included the 200-day moving average at 4387 and, if that broke down, Fibonacci retracements at 3951 and 3847 that intersected with important channel lines. The big prize for bears was at 3393.

By Feb 2, SPX had dropped below the 200-day and the first falling channel was beginning to take shape.  We zeroed in on 4126 by mid February and 3815 by late March.

SPX reached 4125 on Feb 24 and 3815 on May 20 – both a little behind “schedule.” By May, however, we were working out the details of an analog [see: Analog in Play] which suggested the downside could be as low as 3393 by as early as July. This, in our view, was important support as it represented the highs SPX achieved just prior to the pandemic crash in 2020.Markets move for lots of different reasons, but I’ve always been cognizant of the ability of central bankers and other large players to influence prices at critical junctures. One such example was in October when formerly dovish Fed president Jim Bullard enabled SPX to hold important support by suggesting that the end of QE should be further delayed.

Another was in March 2020 when the Dow’s pandemic plunge was arrested within a few points of the Trump’s 2016 election lows by the Fed embracing MMT.

It’s safe to say that some other very important people had their eyes on the Feb 2020 highs. Instead of focusing on SPX, however, they drew the line in the sand at the Dow’s 2020 highs.  From Don’t Forget the Dow on June 16.

I don’t usually pay much attention to the DJIA. It’s a nonsense index that’s manipulated six ways to Sunday and has little following in the investment community. Having said that, the financial press reports on it all the time and the average Joe, seeing this, seems to care.

If the folks behind the curtain have decided that we can’t handle dipping below the “everything is alright” marker, then we could get a nice bounce here.

The Dow bottomed the next day and subsequently rallied over 15%, dragging SPX along with it even though it was 6% shy of its own backtest at 3393.  This threw our analog off course and busted the original falling channels.

But the Dow’s bounce to the top of its falling channel was matched by SPX and COMP.  DJIA and SPX both also backtested their 200-day moving averages, which made for a very clear signal to short once again.

With the SPX analog off course in terms of both pricing and timing, this signal was very much appreciated.  The resistance held and SPX plunged nearly 20% by mid-October – reaching our 3553 target but coming up short of the 3393 backtest once again – this time by 2.8%.  Instead of the Dow, the Oct 13 bounce came courtesy of the Nasdaq Composite. COMP had just reached our long-held downside target of 10122 [see: Update on COMP.]

It was important Fibonacci support and, like the Dow in June, sent a strong signal to algos to rally back to the channel top and the 200-day moving average by the end of the year – a 17.4% rally.

SPX closed down 19.44% on the year after being off as much as 26.7%. A drop to 3393 would have meant a 28.8% loss. Although we needed to make some adjustments along the way, chart patterns and technical analysis more than proved themselves in 2022. I would hate to have been trading the market based on fundamentals.

 

Commodities

We focus mostly on oil and gas, as they tie in so well with the stock and bond markets. In our first post of 2022, we noted that the sharp rise in inflation we had been forecasting since 2019 [see: Inflation Games] had the potential to stabilize if oil and gas prices did, but that stickier measures of inflation (e.g. housing, food, wages) were unlikely to participate.

We had noted in Dec 2021 [see: Inflation Coming Home to Roost] that agricultural prices were already breaking out of a long-term channel.

When Russia invaded Ukraine on Feb 24, the possibility of inflation stabilizing any time soon was eliminated.  The downside scenario for WTI laid out on Jan 4…

…changed quite dramatically.  CL broke out of several significant channels and ran up to Fibonacci levels that we hadn’t expected to be reached until the end of the year. The good news is that 130.74 was solid resistance, which allowed us to revert to a bearish outlook.

It was a forecast that played out nicely.

We pay quite a bit of attention to RBOB, as its YoY delta is highly correlated to CPI.  The relationship shared in our Feb 2021 forecast…

…had changed quite dramatically by Feb 2022.  Importantly, it also reflected the divergence between energy prices and CPI.

Like CL, our RB forecast worked out nicely once the invasion spike was over. RB reached our 2.78 target on schedule in mid-February and was reversing sharply when Russia invaded.

It was a wild ride after that, with prices reaching as high as 4.326 on June 6 before finally backing off. Throughout the spike, we maintained the belief that prices would eventually be knocked back down, with the 200-day moving average being the most likely downside target as, by then, it was paralleling the bottom of the rising white channel from 2020.

It reached the 200-day on July 21, about a week after CPI had posted a 9.1% annual rate and we reiterated the belief that lower prices were both necessary and on the way [see: Oil and Inflation.]

We maintained a 2.50 target, adding 2.28 and 2.16 as subsequent downside targets were reached. By Dec 12, RB had almost fallen below 2.00 to our a.89 target.

Currencies

Our forecasts in currencies were spot on in 2022.  We started out expecting a rally in the DXY relative to both the euro and the yen. We were not disappointed. We began the year [see: The De Facto Shutdown] with a EURUSD target of 1.0829 and USDJPY target of 118 – a target originally set in Mar 2021 [see: USDJY’s Turn.]

These targets were reached on Mar 7 and Mar 11 respectively. We noted at the time that both were at critical levels of support/resistance. If EURUSD broke down, it would likely reach 0.9584 by year end.And, if USDJPY broke out, its new upside target was 132.22.EURUSD reached .9584 on Sep 26 and promptly rebounded, reaching our 1.0431 rebound target by mid-November.USDJPY reached 132.22 on Jun 6…

… at which point we charted a course for 139.43 and 142.07 – which was reached on Sep 6 and briefly overshot before reverting to our 132.22 backtest target.

Interest Rates

As noted above, we began the year with the belief that central banks would take whatever action was necessary to contain inflation and interest rates. At the time, the 10Y was in danger of completing an Inverted Head & Shoulder pattern which would see it break out of a very significant long-term falling channel (at 2.64%) and reach 3.25%.

The 10Y reached 2.64% on Apr 6 and 3.25% on Jun 13, whereupon it backtested the 2.64% level in early August.

Recall that CPI recently reached 9.1%, which had prompted the Fed to continue raising interest rates. We raised our upside targets to 4.37% and 4.76%.

The 10Y reached 4.33% on Oct 21, wavering for a couple of weeks before we began looking for a backtest of the 200-day moving average (currently at 3.27%.)  It is now within 23 bps.

Conclusion

The year started out with the potential for a reasonably positive outcome. The Russian invasion of Ukraine altered the inflation picture so substantially that the upside case was dashed and, for the first time in years, bears enjoyed a year relatively free from central bank interference. In fact, it’s not an exaggeration to say that markets were finally subjected to the consequences of the withdrawal of central bank support.

That being said, central banks have not given up on lowering inflation without recreating the 2000-2003 or 2007-2009 crashes. Time will tell whether or not they are able.

continuing…