Risk Model for the US Stock Market

The S&P 500 closed 2021 as the top major stock market index. History suggests 2022 could be another strong year for investors. While it ended the day with a minor loss of 0.3%, the S&P 500 closed the year up just shy of 27%, the NASDAQ rallied 21% in 2021 - overall an outstanding performance of the larger indices.

Our risk model improved over the last 2 weeks in 2021, but key indicators still suggest an elevated risk for momentum swing traders. Some details:

- after the >5% rally in the second half of December, many of the distribution-days over the recent 25 trading period have lost their relevance. The DD-count shows positive.
- number of stocks making new 52w lows is still higher than number of stocks making new 52w highs - alarm signal!
- number of stocks trading below their 200d MA > number of stocks above their 200d MA - alarm signal!
- up/down volumes still below their 50d MA's and below 1 - alarm signal!
- the advance decline line significantly improved over the last two weeks and is now trending upwards. This could be a very promising signal as this is a leading indicator.
- bulls vs bears is a contrarian indicator which also improved over the last to weeks.

Overall, momentum swing traders can be somewhat optimistic going into 2022. For now, risk is still on an elevated level and swing traders should not yet get too aggressive. Take a few smaller pilot positions and if things start working in your own portfolio, start to increase exposure.