SINGAPORE (Wednesday, 19 January 2022) – As we enter the new year, the global equity markets too are looking for a new direction, having finished the year on a positive territory despite news of new Covid-19 variants. It is however unclear at this stage to say from the charts which way the market will move next.
The S&P 500 and the SPUS ETF (S&P 500 Sharia Industry Exclusions) continued with their uptrend last year as investors were seen making swift sector rotations – moving funds from one sector into another – every time news of new Covid-19 variant broke out, making it a challenge for investors applying the old buy & hold trading strategy.
Chart 1
Source: https://www.tradingview.com/x/1Sy78IoN/
Two main themes will dominate trading and need to be observed this year:
- Inflation and
- Interest rates hikes
Both will determine which market sector investors will focus their attention on. Higher inflation tends to favour the commodity sectors and higher interest rates the financials.
An analysis of the SP Global since the 1970s suggests that during the higher inflation period, commodities are the real shield from the declining purchasing power. Gold markets never really took off when the market was faced with higher inflation in the past. However, gold is a safe haven asset during volatile US dollar fluctuations.
Chart 2: Gold market
Source: https://www.tradingview.com/x/Q6wvt6ye/
Based on the gold market price action, it is interesting to note that it may potentially make a saucer chart pattern over the top, suggesting gold may build some bullish momentum over the long term. If the price of gold continues its upward slope and breaks the previous peak made in the mid-2020, there is a high probability of it breaking the key USD 2,000 to USD 2,100 resistance levels. If this happens, gold could be catapulted towards a technical level of USD 2,400 to USD 2,450 levels.
Commodity Sector Correlates With Inflation
Commodity sector traditionally is the beneficiary of inflationary pressures. Prices of basic materials such as copper, nickel, steel, coffee and livestock usually move higher in tandem with higher inflation rates. Whenever you hear inflation popping up in the news, try to allocate your asset to sectors related to basic commodities. Examples of commodity related stocks are Nucor Corp (NYSE: NUE) and SYSCO Corporation (NYSE: SYY).
Chart: Nucor Corp
Source: https://www.tradingview.com/x/TDi1QgxX/
Chart: SYSCO
Source: https://www.tradingview.com/x/tF4ogm7R/
But should one make the shift into gold this year? There’s a large base of gold bugs predicting the precious metal could turn bullish this year. This could lead to more speculators entering the market, creating a self-fulfilling prophecy pushing gold higher than it should fundamentally be. This is potentially a risky investment decision. To filter out the noise, one way is to watch the stocks of gold miners, such as Barrick Gold Corp (NYSE: GOLD) and Royal Gold Inc (NASDAQ: RGLD). They need to move in tandem.
Chart : Barrick Gold
Source: https://www.tradingview.com/x/NmO4ldYf/
Chart: Royal Gold
Source: https://www.tradingview.com/x/r4BBt9FS/
Technology Under Pressure
The US Federal Reserve has announced its tightening measures – proposing interest rate hikes from early 2022 and throughout 2023. The tech sector is likely to feel the pressure. Traditionally, an interest rate hike is not friendly towards the tech.
However, this time around, the sector could still perform despite the hikes as new Covid variants popping up from time to time may still pose a threat to economic recovery, and technology is very much needed to combat and control further outspread of the virus. This is where the tech sector comes into play especially healthtech and in the communication sector. Both sectors are vital in determining the best course of action and could pinpoint the likely hot spots of the virus outbreak. Among the stocks in these sectors include Pfizer (NYSE: PFE) and Google (NASDAQ: GOOG)
Chart: Pfizer
Source: https://www.tradingview.com/x/obJXUbjk/
Chart: Google
Source: https://www.tradingview.com/x/Rt7Oekcx/
Happy New Year. Invest wisely and select stocks with great fundamentals. Those about to break out from their all-time high would be preferred. Avoid stocks with weak fundamentals such as weakening sales.-/-www.halaluniverse.net
Disclaimer: Mr Mukhriz Mangsor is a Certified Financial Technician and an independent trader who contributes to www.halaluniverse.net on a regular basis. He focuses his attention on the technology stocks listed on Nasdaq. The content of this article are not recommendations to buy or sell a security. All information is intended as information for educational purposes only and not as investment advice. Readers are advised to seek professional investment advice from licensed investment advisors before investing.
