December 6, 2021
Good morning,
This morning’s news headline – “Omicron Spreads; Hospitalizations in Check for Now” – is getting the most attention from trader’s this morning. Futures wavered back and forth all night but sit at the high end of their overnight range (+.40%) an hour ahead of the cash market open. The VIX remains elevated (29.4, -1.3pts this morning), so we should expect last week’s big swings to continue for now at least.
As a contrarian, I’m a bit concerned by, what feels like, a majority of strategists talking up a year-end rally. This sentiment is depicted this morning by Tim Hayes of Ned Davis Research:
Volatility represents uncertainty, and there’s been no shortage of either. But it’s now likely that the fourth quarter rally will soon be reassertive. The Omicron sell-off has relieved excessive optimism and produced an oversold condition, setting the stage for equities to continue the year-end rally that started in October.
Perhaps Tim is right, and that would be great short term. Further out however, I am concerned by what I think Omicron headlines are masking – a change in posture by the Fed. We don’t fight the tape around here as you know, but we also don’t fight the Fed. The Fed tail wind has been at this market’s back for years and last week likely turned it into a headwind. If so, it should start to show up in the intermediate and long term tape signals. We would expect to make an investment allocation change if that happens.
Be well,
Mike