We have reached the end of a very choppy first month in the stock market. Where will stock market goes in 2022 from here onward? This must be on the mind of all traders given that there was a sharp correction of more than 13% followed by a recovery back.
Below is what the first month of 2022 looks like for the S&P 500 (SPX). The SPX ended lower. There is also an increase in fear factor (VIX).
Where Will Stock Market Goes In 2022?
At the start of each year, I usually refer to the studies in the book Seasonal Stock Market Trends by Jay Kaeppel for trends based on historical statistics on where the stock market will go this year. This books has identified 13 different trends based on studies over past 70 years in the market. It is definitely a good reference to use. But do treat it as a reference only. You should still do your own further analysis.
With that said, I am using 2 of the trends within that book in this article. Do refer to the book if you want more details of all the other trends.
The 2 trends that I will be using in this post are as follow:
Trend 1 – Jay Newary Barometer Based on January Market Performance
For this trend, Jay used the performance of the market in January to gauge the probability of a bull market for rest of the year. This barometer has a success rate of 71.4% for getting the market direction correct.
For this analysis, I extracted out the following close price for SPX (based on the chart which I attached above):
3 Jan 2022 – Closed at 4,796 (1st trading day)
7 Jan 2022 – Closed at 4,707 (5th trading day)
25 Jan 2022 – Closed at 4,356 (last 5th trading day in January)
31 Jan 2022 – Closed at 4,515 (last trading day in January)
This barometer looks at the following 3 key parameters:
1. Performance of market in first 5 trading day of January.
In 2022, this shows a down signal.
2. Performance of market in last 5 trading day of January.
In 2022, this shows an up signal.
3 Performance of market in January as a whole
In 2022, this shows a down signal.
Based on Jay’s analysis of past trends, there is only a 50% probability of the market will end up higher by end of 2022. We would be expecting a very volatile market this year.
Personally I will be going for shorter-term trades this year taking smaller profit wins each trade to manage my risk.
Trend 2 – Election Cycle
The 2022 United States midterm elections will be held on 8 November 2022.
We are now in the “Post Election” period going into “Midterm Election” for this year. Based on Jay’s studies (covered in details in his book), the performance of the market over 70 years was found to be as follow:
Post Election year – stock market only up 44.4% of the time
Midterm Election year – stock market was up 63.2% of the time
By combining with the Trend 1 above, I would be more cautious in entering long-term options trade this year (all the way up to 8 November 2022). Instead, I would go for 2 to 3 months DTE (date-to-expiry) option trades. My position sizing will also be reduced to build up my cash pool so that I can invest into great companies (at deep discount) to take advantage of this period.
In Summary On Where Will Stock Market Goes In 2022?
With reference to the 2 trends (out of 13 in the book), there is a high probability of market being highly volatile this year. There is also chance of major swing. So I would be nimble in this year cutting loss and taking profits quickly.
Below is a short introduction of how to use Jay’s Seasonal Trends analysis in the stock market. The voice quality is a bit off but the content is useful.
Additional Bonus Segment – Based on Chinese Metaphysics (Qimen)
This is a bonus segment which is not related to Jay’s book above. I am sharing some additional potential insights on the possible market direction based on one of the ancient Chinese Metaphysics study called Qimen analysis for 2022.
I would not be going into the technical details. Instead, I summarized the key points below.
- Could look for potential trades in companies related to space-travel and biotech.
- There could be a market correction (as much as 25%). So be prepared.
- Aug may experience a significant correction in market
- Apr may experience a correction in market
To end off, please remember that this article is only for educational purpose and is only show the possible direction of the market this year. It is not to be taken at 100% accuracy (in my last check, there is no sure crystal ball for sale yet). It is not meant as a financial advice. Please do your own analysis of the stock market at all times.