Just when you think the coronavirus will start fading off into the distance it makes a comeback with the new Omicron variant, states Steve Reitmeister, editor of Reitmeister Total Return.
Indeed, news of this mutation led to a "sell first, ask questions later" reaction on Friday...then a bounce...then another nasty sell off Tuesday. Why is this happening? And what comes next? We will discuss that and other vital topics in this week's market commentary.
Let’s push the Omicron variant aside for a second just to consider the following stock market logic. The average bear market decline for the S&P is 34%. Thus, if any event happens that increases the odds of recession by 10%, then it would be pretty natural to have a 3-4% decline in stock prices (because that equates to about 10% of a 34% selloff). And yes, if the odds of recession continue to increase, then stocks would keep going down and down.Now let’s bring Omicron back into the conversation. We have a new “variant of concern” that most likely will spread far and wide like Delta. On the bad side it seems that current vaccines may not provide much, if any, protection. On the positive side the symptoms at this stage seem to be very mild. So at this time it was logical for investors to assume the odds of recession increased by 10% with ensuing 3-4% sell off as we go into “wait-and-see” mode for what happens next.
I believe the most encouraging news for US stock investors was Joe Biden’s statements yesterday that lockdowns seem unnecessary. Indeed, that was the prevailing wisdom during Delta where the economy barely skipped a beat and the stock market kept trucking higher.
That is the hoped-for outcome at this time as well. However, we would be foolish to not have our eyes wide open that it could get uglier. As in the virus could keep mutating and become more deadly. If you tack that on top of current vaccines being of little to no benefit, then yes, it will harm the economy and stock market further leading us into a more defensive posture.
For now, we should “stay calm and carry on” with good likelihood of quick and powerful bounce back to the old highs. However, some stocks will get tossed about like rag dolls with the increase in volatility. Most certainly true for positions that benefit the most from a Covid-free world (like airlines, hotels, restaurants, etc). But also true for economically sensitive stocks like energy, materials, cyclicals, etc.
Yes, patience is required, because the stocks that drop the most will also bounce the most. And you’d hate to sell just before a dramatic turnaround. However, if some stocks stay on the outs for too long, then best to take a smaller loss now instead of a much larger loss down the road.
Indeed, this is one of the trickiest parts in all investing. Knowing when to hold’em and when to fold’em. Truly as much art as science. Often the answer is not binary; hold or sell. It can be somewhere between like sell half...hold the rest.
Plain and simple, we will do the best we can in real time. Not all moves will be perfect, but likely the sum total of changes will be beneficial.
In other market moving news, Jobless Claims fell under 200K for the first time since Covid came on the scene. That is a dramatic sign that pre-Omicron things were heating up in a good way for the economy.
The same could be said for the strong regional manufacturing reports for Dallas Fed at +11.8 (above 0 = expansion). Even better was the 61.8 for Chicago PMI (above 50 = expansion. Above 55 = ha, cha, cha!)
The rest of the week there will be even beefier economic reports in the offing. That includes ADP Employment and ISM Manufacturing on Wednesday followed by Government Employment and ISM Services on Friday. The bummer is any positives there will be considered “old news” with greater focus on what is in the offing with Omicron.
So the last stone to overturn is on the price action front with the following key technical levels after closing at 4,567 Tuesday evening:
4,537 = 50-day moving average (purple line)
4,486 = 100-day moving average (red line)
4,296 = 200-day moving average (gold line)
My sense is that if we made it down this far, then another test of the 50-day moving average is likely a given. Let’s remember that it has already happened seven times this year including a breach in September that set the paces for a 10% rally starting in early October.
The 100-day has only been tested once in the same time frame as above. That actually proved to be the key resistance level the market could never truly pierce before heading higher once again.
As for the 200-day moving average, we haven’t gotten close all year. Yes, it is always tempting to believe that this could be the time it happens. But with rates this low...and the experience of the Delta variant never really hurting the economy...then I say odds are against that deep of a dip at this time.
Taking it back to previous statements, we are in wait-and-see mode. Likely we have good reason to expect a hefty technical bounce here off the 50-day and 100-day if needed. And if indeed Omicron goes the way of Delta, we could be back pressing all-time highs before the ball drops on New Year’s.
However, I am prepared to stay objective and open minded to whatever comes next. And if that means Omicron begets more shutdowns and economic damage, then yes, we will get more defensive in our portfolios. That means selling the riskiest stocks and perhaps adding an inverse ETF or two into the mix.
Learn more about Steve Reitmeister at StockNews.com.
