Cross-Asset Strategist & Quantitative Analyst, Pennock Idea Hub

Cam Hui

Cross-Asset Strategist & Quantitative Analyst

Pennock Idea Hub

We are creators of independent equity research. The Pennock Idea Hub team are veterans of the investment industry. Much of our team has spent their careers at Merrill Lynch, Deutsche Bank, RBC Capital Markets and Wood Gundy. We have taken every aspect of research back to the studs and returned to first principles. The Pennock Idea Hub marries the interests of the sell and buy side. 

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Cross-Asset & Quantitative Research

Cross Asset Strategy

Both the Dow and the Transports made all-time highs last week. The technical pattern is consistent with the description of a Dow Theory buy signal.While the Dow Theory buy signal is bullish for stock prices, a number of key risks are lurking as we look forward to 2022.We reiterate our view that the stock market is in a late-phase bull cycle, though that does not mean the economy is in the late-cycle phase of an expansion (see <a href="https://www.smartkarma.com/insights/trading-the-late-cycle-advance" target="_blank" rel="noopener">Trading the Late Cycle Advance</a>).Our base-case scenario calls for a stock market rally into year-end led by reflation stocks. We are entering a period of positive seasonality and the market has been tracking the seasonal pattern relatively well in 2021. Expect a growth deceleration soon afterward, a rotation into growth and a possible correction in Q1, but no bear market.

Both the Dow and the Transports made all-time highs last week. The technical pattern is consistent with the description of a Dow Theory buy signal.While the Dow Theory buy signal is bullish for stock prices, a number of key risks are lurking as we look forward to 2022.We reiterate our view that the stock market is in a late-phase bull cycle, though that does not mean the economy is in the late-cycle phase of an expansion (see Trading the Late Cycle Advance).Our base-case scenario calls for a stock market rally into year-end led by reflation stocks. We are entering a period of positive seasonality and the market has been tracking the seasonal pattern relatively well in 2021. Expect a growth deceleration soon afterward, a rotation into growth and a possible correction in Q1, but no bear market.

Technical Analysis

The stock market is following the script for a melt-up into year-end. However, market leadership may be changing as selected speculative issues are leading in a massive way. Investors should be positioned bullishly, but adopt a more balanced approach between value and growth.

The stock market is following the script for a melt-up into year-end. However, market leadership may be changing as selected speculative issues are leading in a massive way. Investors should be positioned bullishly, but adopt a more balanced approach between value and growth.

Here are our main takeaways from the analysis of daily asset rotation using a 60/40 U.S. stock/bond mix as a benchmark for USD investors.•     The S&amp;P 500 is in the leading quadrant and shows no signs of weakness. The market is on track for a rally into year-end. The open question is whether value or growth stocks will lead the charge.•     Bond prices are in the lagging quadrant but showing signs of improvement. In particular, long Treasuries (TLT) is on the verge of rising into the improving quadrant. Much depends on the language from the FOMC meeting in the coming week.In the wake of a hawkish surprise from the Bank of Canada last week, the market began to price in an aggressive tightening cycle by global central banks as yield curves around the world flattened. Will the Fed also turn hawkish in reaction to market expectations and rising inflation pressures to pull the tightening schedule forward, or will it stay the course, which would be a dovish outcome?The Fed’s tone will also matter to equity market leadership. The value/growth relationship has been correlated to bond yields. A dovish Fed would be value bullish and a hawkish tone would be growth bullish.

Here are our main takeaways from the analysis of daily asset rotation using a 60/40 U.S. stock/bond mix as a benchmark for USD investors.•     The S&amp;P 500 is in the leading quadrant and shows no signs of weakness. The market is on track for a rally into year-end. The open question is whether value or growth stocks will lead the charge.•     Bond prices are in the lagging quadrant but showing signs of improvement. In particular, long Treasuries (TLT) is on the verge of rising into the improving quadrant. Much depends on the language from the FOMC meeting in the coming week.In the wake of a hawkish surprise from the Bank of Canada last week, the market began to price in an aggressive tightening cycle by global central banks as yield curves around the world flattened. Will the Fed also turn hawkish in reaction to market expectations and rising inflation pressures to pull the tightening schedule forward, or will it stay the course, which would be a dovish outcome?The Fed’s tone will also matter to equity market leadership. The value/growth relationship has been correlated to bond yields. A dovish Fed would be value bullish and a hawkish tone would be growth bullish.

There is nothing more bullish than a fresh high and the S&amp;P 500 has surpassed that hurdle. Tactically, the market can pause its advance at any time but downside risk should be limited. The intermediate-term outlook is bullish and traders should be prepared to buy any dip in anticipation of further gains.

There is nothing more bullish than a fresh high and the S&amp;P 500 has surpassed that hurdle. Tactically, the market can pause its advance at any time but downside risk should be limited. The intermediate-term outlook is bullish and traders should be prepared to buy any dip in anticipation of further gains.

Last week, we characterized the stock market as like a rocket on a launch pad. Last week’s events also featured William Shatner, the actor who played Captain Kirk in the original Star Trek series, being blasted into space. Now that Captain Kirk has gone into space, will equities follow?Our risk-on scenario remains intact but we are not ready to sound the bullish all-clear just yet. The market is poised for a FOMO stampede into year-end. While we are in the bull camp, investors should nevertheless monitor the evolution of earnings estimates as we move through earnings season and the progress of Biden’s legislative agenda for bullish and bearish catalysts.

Last week, we characterized the stock market as like a rocket on a launch pad. Last week’s events also featured William Shatner, the actor who played Captain Kirk in the original Star Trek series, being blasted into space. Now that Captain Kirk has gone into space, will equities follow?Our risk-on scenario remains intact but we are not ready to sound the bullish all-clear just yet. The market is poised for a FOMO stampede into year-end. While we are in the bull camp, investors should nevertheless monitor the evolution of earnings estimates as we move through earnings season and the progress of Biden’s legislative agenda for bullish and bearish catalysts.

United States

SPDR S&P 500 ETF Trust is an exchange-traded fund incorporated in the USA. The ETF tracks the S&P 500 Index. The Trust consists of a portfolio representing all 500 stocks in the S&P 500 Index. It holds predominantly large-cap U.S. stocks. This ETF is structured as a Unit Investment Trust and pays dividends on a quarterly basis. The holdings are weighted by market capitalization.

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SPDR S&P 500 (SPY US)

A Dow Theory Buy Signal, But...

While the recent Dow Theory buy signal is bullish for stock prices, a number of key risks are lurking as we look forward to 2022.

Cam Hui

A Question of Leadership

The U.S. market is following the script for a melt-up into year-end. However, market leadership may be changing as selected speculative issues are...

Cam Hui

Waiting for the FOMC

In the wake of a hawkish surprise from the BoC, the market began to price in an aggressive tightening cycle by global central banks as yield curves...

Cam Hui

What More Could the Bulls Ask For?

There is nothing more bullish than a fresh high and the S&P 500 has surpassed that hurdle. Tactically, the market can pause its advance at any time...

Cam Hui

Market Liftoff?

Our risk-on scenario remains intact but we are not ready to sound the bullish all-clear just yet. The market is poised for a FOMO stampede into...

Cam Hui

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