Positioning Going into 2022

To predict the next year, you have to examine what happened this year and imagine how investors will react to future events.  Here are the main known events for the following year:

1. Fed tightening.  Powell has finally crossed the bridge into tightening and focusing on inflation, not employment.  He's given up on the transitory lie on inflation, now that he's been reappointed.  He is so late to tightening that to maintain a tiny shred of credibility on price stability, he needs to raise rates at least once.  This will happen even if you get volatility in the stock market (see December 2015) just because his reputation is on the line.  Not only his reputation, but the political forces are in favor of the Fed fighting inflation, not ignoring it.  

2. Midterm elections.  The results of the November 2022 midterm elections are almost like a fait accompli, with Biden at a very low approval rating and the natural tendency for voters to vote against the party in power in the White House.  With the Republicans look set to take over both the House and Senate, you will start to hear talks about fiscal austerity again.  Even if they win just one of the Houses of Congress, they will stop any attempts by Biden to stimulate the economy ahead of 2024.  This guarantees limited fiscal stimulus for 2023 and 2024, which will get priced in the closer you get to the election.  I am expecting the fall 2022 to be a tumultuous season, making this past September/October look like child's play.  Something similar to October/November 2018 is very much in the cards for 2022.  

Here is how the futures market participants are positioned as of December 14, 2021.

Commercials (taking the other side of speculators) are now the most short in SPX and NDX for the past 52 weeks.  Let's take a look at how the SPX and NDX positioning looks compared to the the last 10 years:

SPX COT (Dec. 2011 to Dec. 2021)

Commercial positioning (in black), is short, but not yet at the extreme shorts of 2018.  So there is still room for speculators to get longer before you really get into treacherous territory.  

NDX COT (Dec. 2011 to Dec. 2021)

 Commercial positioning (in black) is short, but much less short than they were from 2012 to 2017.  However, current levels are similar to 2018.  

The speculator positioning will be something to watch in 2022 as it is showing investors getting bolder in taking long positions just as the fundamentals look to be getting worse.  At the very least, the tailwind of having almost no speculative long positioning in SPX and NDX futures for most of 2021 has gone away, and speculators will be feeling more pain and more likely to panic sell when you see stock index corrections.  

With the double negative catalysts of a Fed about to embark on a rate hiking cycle and a midterm election that will signal the end of fiscal largesse for 2023 and 2024, you are looking at a double whammy of monetary and fiscal tightening.  I hear the media talk about the Fed tightening, but almost no talk about the implications of Republican majority in Congress leading to fiscal tightening.  I am sure you will start hearing more about that as you get closer to the fall of 2022 and the polls start to clearly show the Republicans taking the majority in Congress.  

My general take on 2022 is the SPX topping out in early spring of 2022, with a waterfall decline sometime in late spring/early summer, volatile and wide ranges during the summer, perhaps making a double top, and then the beginning of a long downtrend and the start of a bear market in the fall of 2022. 

We are getting a late Santa Claus rally, as the market made one more scary looking dip on Monday to shake out the remaining weak hands before the year end rally.  With SPX futures near 4700, it is looking like most of the year end rally has been compressed into the past 3 days.  I am looking to get short SPX soon, as long as it is above SPX 4700.  I see very good risk/reward for a move back down towards 4520-4540 by middle of January.  Although I eventually expect the SPX to make new all time highs by February 2022, I am looking for one last scary looking dip towards 4500 in January, hopefully with lots of put buying to set up a strong rally into February.  

Expecting Treasury strength, SPX weakness starting from the last couple of days of the year and extending into mid January.  Will be positioning accordingly by early next week.