The Week Ahead: Volatility Ahead Of Central Banks, Trend Crossroads

 | Sep 04, 2022 10:27AM ET

  • Investors to continue rotating out of growth into defensive, dividend players.
  • Short-term uptrend held after price confirmed long-term downtrend.
  • Energy to fall, as recession outweighs war.
  • How to determine whether my S&P 500 prediction is correct

    • This week could prove to be a technical catalyst between the short-term and the long-term trends as global central banks are slated to increase interest rates amid persistently high |inflation.

    With September historically the second-worst month of the year, investors are likely to resume a rotation from growth to defensives, energy, and dividend stocks.

    Energy was the only S&P 500 Index sector in the green, rising 1.83% on Friday.

    Utilities was the clear relative winner for the week, retreating only 1.47%. Healthcare followed with a 1.81% decline. On the other end of the spectrum, technology plunged by over 5%.

    On a monthly scale, only energy and utilities were up, 4.36% and 0.97%, respectively. Technology lost 7% during that time.

    Utilities outperformed in the past three months, losing just 0.15%. Communication services lost 11.65%. However, materials underperformed with a 15.05% plummet as economic growth slowed.

    Also, on a six-month basis, only energy and utilities were green, roughly 9.5%. Underperforming, once again, was communication services - down 21.02% - and technology, which slumped 13.88%.

    Again, the same sectors were the only two S&P 500 sectors that were positive for the year, with energy catapulting 44.07% and utilities gaining 4.22%.

    Finally, on a 12-month basis, energy surged 63.52%. Utilities climbed 6.46%, putting the same two industries alone in green territory. Conversely, communication services was gutted with a 30.7% loss, followed by technology's 23.6% drop. At the same time, communication services lost 37% and technology 16.3%, coming in as the two worst performers.

    Energy has been outperforming only due to the Russia-Ukraine war. However, the sector closed on Friday less than 0.5% from its lowest level since Jan. 27, on prospects of a slowdown. I have given a repeated bearish call. In this post WTI was trading above $95. According to my analysis, oil is en route to keep falling below $60.

    So, energy's outperformance thus far does not represent economic health, in my opinion. Instead, its continued decline does. Conversely, the rotation into defensive and dividend payers out of growth stocks is a vote of no confidence in economic growth.

    We get confirmation from the global bond market, which fell into a bear market last week for the first time in a generation. Bonds suffered their "worst year in history " due to an extreme transition from the lost decade of little to no inflation to the highest in four decades.

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    I have been bearish throughout this entire rally since the mid-June bottom. I wrote a few weekly posts in which I said that I don't know whether stocks will necessarily fall this week, but that I expected them to. When they finally did top out Aug. 16, having lost nearly 10% since then, some readers commented that, of course, at some point markets will fall. They said I was a "permabear," irrationally pessimistic. As far as they're concerned, if stocks didn't fall on the day or week I said I expected them to, I was wrong.

    But assets don't move in straight lines. When I make a call, I am not saying that the asset will go in my direction from that moment. I clarify that the asset may move the other way first. So, how to know if my call is successful or not? There must be a gauge. Those are peaks and troughs.