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January 11th, 2022 
Awake Goy Commentary
This Monday’s rally amounted to the 69th time the index has hit a new record high this year. The rise has been unbelievable, with the S&P closing on the upside nearly 30% of trading days.
The S&P is up year to date 24%, Dow Jones up 19%, and NASDAQ up 19% as of the close of the market on Monday.
JPMorgan chief macro equity strategist Dubravko Lakos-Bujas in new research released Monday remains bullish on the market and recommends keeping “risk on trades” intact as we enter 2022.
Lakos-Bujas acknowledges that some experts are warning that they see a market movement that may be construed as late-cycle dynamics, resulting in an intra-cycle market correction of 10-20%. He and JPMorgan believe the market is still in rally mode…
“The conditions for a large sell-off are not in place right now given already low investor positioning, record buybacks, limited systematic amplifiers, and positive January seasonals.
“We find the current setup very attractive for high beta stocks—emphasizing both sides of the barbell: (1) on the value/cyclical side, in particular, reopening stocks (such as travel, leisure, hospitality, experiences) and energy; (2) on the secular growth side various high beta segments (such as payments, e-commerce, gaming, cybersecurity, biotech) have already seen significant multiple de-rating (i.e., -30% to -70%), yet fundamentals for many of these themes remain intact with continued strong secular growth and large addressable market sizes. Historical analysis (30+ years) shows that the largest outperformance of high beta stocks tends to be in January (i.e., tax-loss harvesting, investor bottom fishing, etc.).”
Lakos-Bujas isn’t the only Wall Street analyst who is still very bullish on the major indexes. Investors are buying with both hands, as reflected in the fact that 26 out of 30 Dow Jones Industrial Average components have risen this year and continue to climb, paced by gains in Home Depot, Cisco, and Microsoft named as Yahoo Finance Company’s stock of the year.
The momentum in the markets persists despite numerous macroeconomic challenges, the persistent pandemic, the possibility of a military invasion by Russia of Ukraine, and a lengthy list of possible black swan events growing, including reports of a new bird flu nightmare developing in Isreal. I think JP Morgan may be too bullish.
Another factor in my more bearish view is inflation. We will likely see inflation finish 2022 at over 6% in the best-case scenario. In the worst-case scenario, over 8% is driven in large part by the creeping oil supply shock that’s approaching.
At the heart of my inflation concern is the cuts in oil production starting last year as the pandemic took a vice grip on the world economy driven by a massive decline in energy consumption. This resulted in a substantial curtailment in investment and development in oil production worldwide.
As oil prices declined, former President Donald Trump intervened and pushed oil prices higher by negotiating with OPEC and Russia to reduce their oil output just as the price of crude oil was cratering towards $30 a barrel and looking like it could fall to the low 20s. He was focused on re-election and didn’t want to alienate his oil constituency. The result is now a year and a half later, the price of crude oil is over $70 a barrel.
Keep in mind that oil is $70 a barrel with 11.2 million jobs available and over 4 million workers still idle due to the continuing pandemic. In addition, oil consumption continues to be reduced by millions of people in the United States and around the world, still curtailing their travel. Here in the United States, as the Omicron variant spreads like wildfire, thousands of flights have been canceled due to flight crews having to isolate after contracting the coronavirus.
Assuming that the Omicron variant subsides by March 2022, as many health experts believe, no other coronavirus variant mutates that’s as dealy or contagious as the Delta or Omicron variants; oil consumption should rise. In addition, because of the lack of output, we are likely to see the price of crude oil driven over $90 barrel. This will shatter hopes that the inflation we are experiencing is transitory.
The current shortage of oil will not likely subside substantially before the 2024 U.S. presidential election. The Federal Reserve will be forced to hike interest rates for at least 2-3 years to battle higher than expected inflation. This will support my view that inflation expectations are conservative.
As most knowledgeable investors, economists, and stock analysts will tell you, 2-3 years of higher interest rates will be awful news for equities. With the major indices priced at perfection, the potential of a pullback of 20% in the market cannot be dismissed as a temporary blip that will quickly be recovered.
I am convinced that we are looking at a longer-term market correction. And at the same time, the possibility of a short-term panic selling event. As a result, I’m not as bullish on the broader market as JP Morgan and Dubravko Lakos-Bujas.
I believe now is the time to place some cautious hedges against a short-term and longer-term pullback in the market. I recommend taking advantage of the higher option premiums that exist on your equity positions and sell out of the money call options against your positions two or three months out. Take in the cash to cushion against a short-term market pullback that JP Morgan predicts.
Further, because I think the danger is more severe and longer-term, I recommend staying alert and willing to make money on the downside. Don’t just hold your breath and look for a sell-off to be quickly reversed, as we saw in March of 2020.
If you think a sizable pullback is on its way, prepare. If the technical indicators you use give you a sell signal, be prepared to hedge the S&P with some PUT options or to bet on the downside directly. In any case, the idea of just accepting a 20% correction doesn’t seem to be the smartest strategy.
As I stressed earlier in this article, I think 2022 will be a stock pickers market. My suggestion with that approach is, to begin with buying domestic oil and gas stocks like Pioneer Natural Resources Company (PXD: NYSE) and Cheniere Energy, Inc. (LNG: NYSE). Consider some banking stocks like Citigroup Inc. (C: NYSE) and The Toronto-Dominion Bank (TD: NYSE) with interest rates rising and business still humming their margins should improve. I also recommend zeroing in on the stocks of the future that can’t make enough computer chips like NVIDIA (NVDA: NASDAQ) and or cashing in big on artificial intelligence like International Business Machines Corporation (IBM: NYSE) and Alphabet Inc. (GOOG: NASDAQ). Also, focusing on the one company with an Alzheimer’s drug that really works could be a huge winner in 2022; Eli Lilly and Company (LLY: NYSE) has one, and it is my best pick among biotech going into 2022.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
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