Dow Jones Leaps As Omicron Fears Ease; Airline Stocks Take Off As Bargain Hunters Swoop In

After Friday's sell-off, U.S. stocks regained ground on Monday as fears over the COVID-19 omicron variant began to subside amid early indications that the heavily mutated strain may only cause mild disease. At the market close, the Dow Jones (DJI) surged 1.87%, adding 646 points to end the day at 35,227, a rally that allowed the industrial-heavy index to erase all of last week's losses. For its part, the S&P 500 gained 1.17% to finish slightly below the 4,600 level, while the Nasdaq 100 underperformed the main averages, climbing only 0.85% to 15,846, hindered by a sharp rise in U.S. yields across the Treasury curve.

During the trading session, economic recovery sensitive and reopening stocks were the clear winners, with energy, airlines, and cruises leading the charge higher. Investors appeared to look past the pandemic threat after preliminary data from South Africa suggested that omicron is not causing severe illness.

According to a provisional report based on two weeks’ worth of data from the Steve Biko/Tshwane District Hospital Complex in Pretoria, most hospitalized individuals with the new virus variant are not oxygen dependent, have no serious respiratory symptoms, and their average length at COVID wards is only 2.8 days, compared with 8.5 days for previous versions of the coronavirus (delta for example).

Although the omicron patient profile may change as more information becomes available, the statistics gathered so far seem encouraging and enough to give bargain hunters cover to swoop in and pick up travel and leisure shares at depressed and very attractive prices amid recent weakness.

Against this backdrop, American Airlines, Delta Airlines and United Airlines exploded higher at the start of the week, soaring 7.88%, 6.03% and 8.32% respectively, though news that Europe and the U.S. may roll back recently implemented travel restrictions before the end of the year also reinforced bullish impetus.

Cruise Lines also saw impressive gains, with Carnival Corporation, Norwegian Cruise Line Holdings and Royal Caribbean up more than 8%. Though traders with long positions may be tempted to take profits, airlines and cruise stocks may still have room to move higher, as they appear significantly undervalued after selling off non-stop in the last few months as the health crisis dragged on.

However, for the reopening theme to maintain the momentum seen on Monday, the omicron strain must prove to be a false alarm. At this point, we can’t say with certainty that this will be the case as data remains sparce and inconclusive, but if this scenario were to play out, this group may have significant upside heading into 2022. On the flip side, if omicron turns out to be deadlier than other strains and can evade existing vaccines, today’s rally may easily be dead-cat bounce, meaning a bearish reversal and more pain could be just around the corner for stocks linked to the recovering economy.

To avoid being caught off guard and on the wrong side of the trade, market participants should closely follow COVID-19 news in the coming days and weeks, as we should soon get more information and clarity on the characteristics of the omicron variant once scientists conduct more sequencing and complete comprehensive epidemiological studies.


Leaving aside market sector performance and focusing our attention on the Dow Jones Industrial Average, the blue-chip index surged almost 2% on Monday after clearing the 34,750 hurdle, but could not overtake decisively its 50-day SMA.For upside pressure to accelerate, a daily close above the 50-day SMA is required as this event could attract buyers and trigger a move towards trendline resistance near 35,580. This area is key and technical analysts are keeping a close eye on it given that a clean break could pave the way for a run towards the all-time high of 36,565.

On the flip side, if buying activity weakens and sellers resurface, the Dow could pivot lower and fall towards support at 34,750. Should bears manage to drive the index below this floor and later the 200-day SMA, the December low near the 34,000 psychological level would come into play.


(Click on image to enlarge)

Dow Jones Chart prepared in TradingView

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