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When we discuss investment returns, it looks like it was a good 2021. There were certainly many challenges during 2021, including the ongoing strife caused by COVID-19, geopolitical tensions, rising crime, inflation, worker shortages, etc. However, investment returns were positive, considerable, and once again, they spoiled the average investor.

Heed our words: three straight double-digit returns are not the norm. Folks, the long-term average of the stock market is about 8%, so any year we get close to that, we are on a normal trajectory of average stock market returns. When you have three good-to-great years, one must take note that at some point there will be a reversion to the mean. Market returns will inevitably fall back to long-term averages.

There are many reasons that the markets produced substantial returns during 2021, not the least of which was the Fed’s continued contribution to buying securities along with the government’s infusion of monetary easing to help rescue parts of the economy that suffered through the partial shutdown of 2020. Additionally, earnings increased dramatically year-over-year with double-digit earnings growth for the S&P 500 (estimated 19%).

Marry easy monetary policy, fiscal stimulus, and strong earnings growth with massive stock buybacks (to the tune of $850 billion or more), and you have a foundational recipe for good stock market returns.

If you review the best places to have invested in during 2021, you’ll find some sure-fire winners -- many of which our guidance was fortunate enough to call. Here are a few areas we alerted readers and members to and took advantage of:

• Energy’s liftoff and rise (USO & ERX) and specifically natural gas (UNG).
• Semiconductors, which a few models had invested in (SOXL).
• Retail (RETL).
• Commodity ETFs like DBC, DBA, CANE, and WEAT.
• The US dollar (UUP).
• Cryptocurrencies (SOL-X, DOT-X).

What Song Might We Hear Next?

That is the million, or let us say, billion-dollar question that everyone from the top analysts, hedge fund managers, pension fund administrators, RIAs, and individual investors are all asking. We don't have a crystal ball, and thankfully, many of our investment strategies are quantitative and will react quickly to the unfolding trends in the market. We are also blessed with three founders and a great team of analysts who have been trading the markets for many years, including our own Michele “Mish” Schneider, Director of Research..

For summary purposes here, we have listed a few of the points that make up her “song” for the New Year:

• Continuation of the inflation trade. This should benefit materials, agricultural and commodity stocks, and ETFs.
• Transportation looks to have a potential “breakout year” once things settle down with COVID-19 and airplanes, specifically, have less disrupted schedules.
• Retail sales stay strong, and consumer optimism remains high, provided inflation does not create out-of-sight pricing.
• Gold, silver, and other metals/mining may have a breakout year and catch up as the dollar declines. Strong demand for inputs for technology products continues to fuel scarce mineral demand throughout the world.
• Rates trend up, but not too drastically, and the Fed is challenged on whether to raise rates faster than expected based on inflation.
• Cash may be king at times as we get hit with corrections as multiples contract as a result of rising rates or higher trending inflation.
• Energy prices continue trending higher spurred by rising demand, especially from the transportation sector. This will create desirable energy trading opportunities.

We think an overriding principle that may take hold is the demise of the 60/40 portfolio, which has been the big winner these past 10 years. If we see stocks being challenged during 2022 along with negative returns in broad-based fixed-income investments, the 60/40 construct may become an unfavorable path.

Risk On/Bullish

• Transportation (IYT) showed risk-on sentiment as it maintained its current level.
• Semiconductors (SMH) got a bit overbought. It is mean-reverting after making new all-time highs and testing the top of its two-month trading range, but it is still a leading sector.
• SPY and DIA made new all-time highs.
• Every major market sector that we monitor was positive over the past week, with real estate (IYR) and homebuilders (XHB) leading the rally up.
• The weakest performing sectors this week (although still positive) were financials (XLF), consumer discretionary (XLY), technology (XLK), and semiconductors.
• Underlying market sentiment appears to have improved according to the Hindenburg Omen indicator, which has backed off from over 20 omens back down to 16 omens now, a definite risk-on indication.
• New Highs/New Lows for SPY improved to a risk-on scenario as well.
• Established Markets (EFA) has successfully mean reverted from the bottom of its year-long trading range, and if it can clear either of its longer-term 50 or 200-day moving averages, we could see a significant move back towards the top of its range.

Risk Off/Bearish

• Value stocks (VTV) are still improving against growth (VUG).
• Within Mish’s Modern Family, biotech (IBB) was the worst performer and down over -1.5% on the week.
• The blended US Fixed Income ETF (BND) is under pressure and in a bear phase, pointing to a higher interest rates picture gaining momentum.
• The biggest concern in the main market benchmarks is that IWM has stalled below both its 50 and 200-day moving average, and it is currently in a distribution phase.
• Utilities (XLU) closed at all-time highs, well outperforming the SPY on a relative basis, which is a risk-off indication.
• Gold (GLD) improved on a relative basis compared to the SPY and moved to a bullish phase. This is a risk-off indication, likely due to global geopolitical stress such as the conflict on the Ukrainian border.
• Market Internals for the SPY are looking to be potentially overbought, with the McClellan Oscillator at its highest level since October.

Neutral Metrics

• Risk gauges improved to bullish to start the week, but are now neutral for the 3 key indices.
• Low holiday volume patterns are not definitive at the moment, with slightly more distribution than accumulation days over the past two weeks in the indices.
• Inflation-adjusted Bonds (TIP) have regained its 50-day moving average, while interest rates, in general, remain under pressure, while the Blended US Bond ETF (BND) is drastically underperforming the SPY on a relative basis.
• New Highs/New Lows for the Nasdaq Composite is not nearly as strong the same measure for NYSE stocks, and it is still looking to bounce from oversold levels.
• Interestingly, the US Dollar looks under pressure and is at support at its 50-day moving average, while the euro (FXE) is looking to break through its 50-day moving average -- there are nearly opposite chart patterns between the two.

Crypto Pulse

• Bitcoin (BITCOMP) sold off more than -6% on Tuesday, but is still maintaining its December trading range with support at $45,500.
• Ethereum (ETH-X) took a -7% hit this week, but it still relatively outperformed its biggest Layer 1 competitors Solana (SOL-X) at -11.3%, and Terra at -10.3%.
• Algorand (ALGO-X) with a rise of +3.1% was the top-performing large-cap cryptocurrency this week because of the announcement for the Algofi staking rewards program in Q1 2022.
• According to the Triple Play indicator, Bitcoin has underperformed the SPY on a relative basis since the last week of November.