Bank of America's technical analyst says the charts point to a rocky year in 2022

Published Mon, Dec 6 20212:23 PM EST

The technical picture for the stock market is pointing to an uneasy road ahead, according to Bank of America's chart analyst. "As we move toward 2022, many indicators across breadth, volume, credit and financial conditions have mature signals, bearish divergences or failed breakouts," Stephen Suttmeier, technical research strategist at Bank of America, said in a note. The bull market could enter a period of weakness in the new year after a strong 2021 that saw the S & P 500 gain more than 20%. Volatility has already made a comeback lately as investors grapple with fears of the omicron coronavirus variant, sustained inflation as well as a reversal of ultra-easy Federal Reserve monetary policy. Here are some technical investors that saw flashing red lights, according to the Wall Street firm. Weakening breath The market hasn't had a sustained bullish breakout in the second half of 2021 as measured by the advance-decline (A-D) lines for both NYSE stocks and all issues. "This contrasts to November 2020, which was when these measures of market breadth broke out to confirm the post 2020 election breakouts across the major US equity indices," Suttmeier said. "Sustained breakouts for these A-D lines is needed to suggest a stronger market breadth environment." Low up volume Meanwhile, cumulative net up volume has not broken out to the upside in late 2021 after peaking in June. The lack of a breakout in volume "is a bearish divergence against the new highs on the SPX into November," Suttmeier said. "We view this as a risk heading into 2022." Risk from credit markets The U.S. high yield option-adjusted spread has not hit a new low since early July, signaling deteriorating credit conditions, the bank said. "We view this a risk for US equities as a widening high yield OAS suggests that the equity rally is in its later stages," Suttmeier wrote. Inflation risk Finally, the risk of surging inflation could have the potential to derail the bull market, if history is any guides. "Inflation puts the SPX in a tough spot," the strategist said. "Transitory or not transitory. It likely does not matter. In our view, the cycle for inflation based on monthly CPI YoY has painted the SPX into a corner." The consumer price index, which is a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% from a year ago in October , the most since December 1990. The CPI for November is expected Friday morning. Economists polled by Dow Jones predict it rose 0.6% on a monthly basis, or 6.7% year over year. Data show that if headline CPI moves above 6.3%, the S & P 500 can have "significantly negative returns" going out from three months to a year, Bank of America said.

Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 5, 2020 at Wall Street in New York City. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)

Photo by Johannes Eisele | AFP | Getty Images

The technical picture for the stock market is pointing to an uneasy road ahead, according to Bank of America's chart analyst.