Although the S&P 500 Index began flashing caution signals two weeks ago, Friday's Covid Omicron variant news rightfully deserves the "Something Unexpected" designation. The Market Review explains along with another WTI Crude Oil update.

S&P 500 Index (SPX) 4594.62 lost 103.34 points or -2.20% last week after making a new intraday high last Monday at 4743.83 then closing lower to create a Key Reversal with a lower the next day as the measuring objective. From a trendline perspective it closed right on the upward sloping trendline from the October 4 low at 4278.74 that could provide some support especially since the market closed early on Friday. In the more likely event of a further decline, the September 2, high at 4545.86, may offer support with the next stop down around the 50-day Moving Average at 4527.51.

Invesco QQQ Trust (QQQ) 392.47 slipped 11.52 points or -2.85 last week after reaching a new intraday high at 408.71 on Monday then closing lower also making a Key Reversal, after briefly breaking out above 405. The September 7 high at 382.35 should provide support followed by the 50-day Moving Average down at 378.67.

iShares Russell 2000 ETF (IWM) 223.59 dropped 9.13 points or -3.92% after opening with a gap lower then closing below both the 50-day Moving Average at 228.22 and the 200-day Moving Average at 223.85. Declining more in percentage terms than both the SPX and QQQ, for the second week, small cap stocks reflect diminishing expectations for higher interest rates, since small caps have a tendency underperform when interest rates decline. Indeed, the yield on U.S 10-Year Treasury Note declined 6 basis points last week to end at 1.48%.

CBOE Volatility Index® (VIX) added 10.71 points or +59.80% last week ending at 28.62. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added 8.05points or +62.16% to close at  21.00%. Notice the spike up on the far right side.

VIX Futures Premium

VIX futures premium ended Friday at -5.04%, in the red bear zone, with 26 days to expiration for the front month December futures contract, vs.19.80% in the green bullish zone on November 19.

The chart reflects the distance from the VIX to the futures curve computed from the two front month contracts. Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

VIX-VXST Spread

After the surprise "Something Unexpected" attack on Friday, this indicator can be useful to help decide when it's safe enough to "get back into the pool." While it usually spikes back up, it struggled in September before heading higher again. The all clear signal comes when it turns positive again.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications. This recent chart highlights the importance of the 500 level.

"The NYSE’s Ratio-Adjusted Summation Index (RASI) has just had a failure at the +500 level, and that spells trouble for the uptrend." Adding Friday's 70.12 decline, for the week it dropped 209.82 points or -55.31% to end at 169.52.

WTI Crude Oil (CL) 68.15 basis January futures ended Friday down 10.24 points or -13.06% making the widest trading range in the last year. For the week, it declined 7.77 points or -10.25%. While it seems like an unprecedented drop, on April 21, 2020, it declined 69.5%.

From a trendline perspective, it closed below the upward sloping trendline that began with the low on November 2, 2020, at 33.64 and just slightly below the 200-day Moving Average at 69.72, one that does a good job defining the current uptrend.

It may be premature to declare the end of the uptrend since Friday's "Something Unexpected" shock came on a light trading day after Thanksgiving with "thin" markets. Odds are it will attempt to rebound back above the 200-day Moving Average and perhaps even reach the upward sloping trendline.

However, the December seasonal record shows weakness and with more Covid uncertainty any rebound attempt could be limited.

For a guideline, the seasonal chart from barchart.com follows:

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing, since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

While not the first time for this strategy monograph, it does make a good example. Market Breadth started narrowing on November 15 after reaching 517.75 on November 12. Then, last Monday's Key Reversal warned of a lower low the next day; even though not apparent until Friday's "Something Unexpected," this last Key Reversal really stands out. Easy to see in hindsight, but harder to take very seriously at the time, since everybody knows equities typically advance in December.

From last week's Digest Issue 47 "WTI Crude Oil Seasonal [Charts]" Lower crude oil prices and lower interest rates suggest increasing expectations for slower global GDP growth once again." Prudence now suggests hedging some long duration risk until crude oil and equities stabilize.

To Summarize Friday's "Something Unexpected," event – how about shudder, wobble, or perhaps quiver?

Summary

Declines by major equity indices, along with crude oil may overstate market risk since Friday's short-day trading activity likely created thin market conditions in some sectors. Although a few indicators suggested caution, news of the Covid Omicron variant took a heavy toll and deserves the "Something Unexpected" title.