Why the Rough Start to 2022?
The turn of the year set up a perfect storm. Most investors made money in 2021, preferring to wait until 2022 to sell funds in order to delay capital gains tax payments for another year. Concurrently, the FED had long said it intends to begin raising interest rates with its first installment scheduled around March 2022. Rising rates are said to be particularly detrimental to large cap tech stocks. Notably, the drop in the Value Sentiment Indicator component of StormGuard at the end of 2021 was likely a reflection of fewer new highs in tech stocks as rotation from them began to reposition portfolios for the expected higher rates ahead. When 2022 arrived, tax selling and portfolio repositioning not only accelerated but was well-aligned with the motives of the interest-rate haircut vigilantes demanding downward adjustments in stock valuations.

On January 27, the markets found a high-volume capitulation bottom following a 9.7% drop in the S&P500 and a 15.5% drop in the Nasdaq from their highs in December. In the four days since the bottom, the S&P500 and Nasdaq rebounded 6.1% and 8.0% respectively. Notably, both bonds and treasuries also declined during January. When there is a flight to safety, bonds and treasuries generally rise. It appears that markets are finding a new comfort zone for now but will likely exhibit further volatility while waiting to see how the FED executes its plan.

 
Why did StormGuard Take so Long to Sell-the-Dip?
The simple answer has two parts, as illustrated in the charts below. First, in the past 30 years, there have been 30 dips of 10% or more and just two dips of 50% or more. Thus, there are 14 false exits for every true exit but each event extracts a whipsaw toll. Semi-regular whipsaw losses are an excessive price to pay. Second, as illustrated below, month-end trading produces better results and fewer trades. This is the reason why the phrase “buy the dip” is common, but “sell the dip” is never heard. The best way to reduce the whipsaw problem is to use additional indicators and tests to eliminate false triggering on as many of the dips as is possible. Its StormGuard’s job to pull out all the stops and find indicators and tests to profitably “sell the dip.”    

     

Hot TIPs for Bear Market Strategies
A few subscribers recently suggested that we update the Bear Market Strategies to include a TIP ETF (inflation-protected treasury) because they are designed to include a hedge against inflation. We agreed, given their performance during the last 18 months relative to treasuries, bonds, and gold. Most of the Bear Market Strategies were updated in January to include TIP, TIPX, or TIPZ. 

        

What Future Conditions Could Eventually Cancel StormGuard?
The simplest description is: When any one or more of the metrics for price-trend, market momentum, and value sentiment become positive in value and the remaining metric(s) are increasing at month-end, StormGuard will be canceled. Additionally, StormGuard may be canceled at any time during the month if a particularly sharp rebound follows a recent market decline.
 
Once StormGuard has triggered, the system inherently takes on the risk of suffering from a whipsaw loss if the market moves higher before StormGuard is canceled. The best way to reduce the probability of whipsaw loss is to employ (a) multiple tests to validate the triggering of StormGuard, and (b) multiple tests to determine the earliest time when it is reasonably safe to cancel StormGuard.
 
Now that StormGuard has triggered, the market directions it must consider include:

1. Upward – continuing the recent sharp partial rebound.
2. Downward – retesting the recent bottom and failing.
3. Sideways – while evaluating planned interest rate hikes.

In response to requests for a better understanding of how StormGuard could be canceled in the near future, I have provided the below technical description of the tests associated with the above possible market directions.  Warning: These explanations inherently contain some detailed geek-speak.
 
Upward Test: Each of the following conditions must be true to cancel StormGuard: (1) StormGuard has triggered at least five days ago, (2) the last market low was within two months, (3) the market rebounds in one of the following ways, (a) 60% of its drop within four days, (b) 70% of its drop within six days, (c) 80% of its drop within eight days, or (d) 90% of its drop within ten days. This test addresses short-term corrections and knee-jerk reactions to news items.
 
Downward Test: Each of the following conditions must be true to cancel StormGuard: (1) StormGuard has triggered at least five days ago, (2) the last market low was within two months, and (3) the rebound is one of the following (a) >15% and the market is at a 25 day high, (b) 10% to 15% and the market is at a 30 day high, or (c) 5% to 10% and the market is at a 35 day high. This test addresses relatively deep market crashes.  
 
Sideways Test: Each of the following conditions must be true to cancel StormGuard: (1) StormGuard has triggered at least five days ago, (2) the last market low was within two months, (3) absolute rebound from the bottom is > 4%, (4) rebound is > 50% of its drop, (5) current price is now the highest in 25 days. This test addresses corrections that stagnate (unable to make further lows) and eventually establish a worthy upside breakout.