Omicron is front page news as the COVID spikes that we reviewed (ref. Reuters COVID Tracker, h/t subscriber FG for the link) as the 4th wave of infections reviewed back in NFTRH 682 gains full headline status with added sentiment fuel from Omicron’s spread and the hawkish (at this point, less inflationary) Fed.
You can click the graphic to see how the media is presenting these threats to investors this morning.
Looking at the futures, the 10yr T Note is forming a bounce pattern (within a downtrend) that looks similar to May-June. I have asked (thinking I know the answer) who will buy Treasury bonds when the Fed tapers? Well, the answer is still the same. Theoretically at least, the investing public will buy T bonds amid a risk ‘off’ market phase which, conveniently to the Fed, will tamp down inflationary fears. So the flip side view of the 10yr bouncing within a downtrend is that markets are taking a cool down amid an uptrend.
ES (S&P 500) does not want to got through much more weakness or we’re looking at a test of the 200 day averages (4343).
NQ (NDX) is ticking a slight lower low and this too opens up the possibility of a test of the up trending SMA 200 if Santa does not arrive promptly and reverse things.
Final Notes
If the markets do not bust bearish for real, this is an unpleasant pullback in a still bullish macro. A pullback working against the inflation trades and cyclical markets, but with favored sectors that could potentially emerge.
Cannabis
Another hat tip to FG for sending this along last night…
While not really a ‘stay at home’ sector (although I think of all those couches, TVs and pizza) it is a growth sector awaiting Federal level reform. It could be upcoming. If the markets get wrecked in the near-term so too will the ‘tax loss’ play here. But it works as a long-term potential play as well.
Cloud/SaaS/Work/Play-at-home/remote tools
If COVID wave 4 is so threatening (far fewer deaths per infection due to vaccine and boosting) then we might get a real promotional push by the media back into these stocks that worked so well in 2020. To boot, if the market keeps it together they may work very well as a 2021 tax loss spec, which I have positioned for.
Related would be the COVID vaccine stocks, only one of which I own, DVAX. And I own that with a lot of consideration for the long-term Hepatitis vaccine potential.
Semiconductors
Leading, trending up but correcting from overbought. If the inflated economic expansion ends I think there will be strong negative move here as well. But so far, it’s a grinding correction with still solid sector fundamentals.
Gold Stocks
So if the Omicron/Fed two headed monster really does tank the markets, gold will out-perform oil/energy, stocks, materials, all the inflated stuff. If that happens the bottom line execution of gold mining businesses will improve and the psych profiles of investors will degrade (lose confidence). Those are the sector and macro fundamental considerations we’re looking for.
Typically the gold stocks tank also, along with or even before broad markets, but after unloading inflation devotees at the lows they bottom and rip first during/after deflationary interruptions of the ongoing long-term inflationary regime the Fed’s got going.
Bottom Line
Sentiment is in play, big time. It may get worse before it gets better (I plan to risk manage as needed, but feel I already have done so to a large degree), but if it’s not broken (the market isn’t) a ‘set it and forget it’ bear attitude is probably not any wiser than the same type of bull attitude.
Meanwhile, amid the challenges of the moment I am interested to see if any sectors get rotation in line with the (negative) hype of the moment.
