Omicron Strikes Again

Despite last Wednesday's roaring advance following Federal Reserve Board Chairman Jerome Powell's comments the gains quickly faded as Omicron returned to the center stage. It seems last week's claim jumped the gun, based on market indicators in Digest Issue 50"Omicron Worries Fade [Charts]." Details follow in the Market Review including some comments about the annual forecasting ritual underway.

S&P 500 Index (SPX) 4620.64 dropped 91.38 points or -1.94% last week after filling the December 7, opening gap up, despite it being a measuring gap with no requirement to be filled. Wednesday's advance on Jay Powell's as expected (no surprise) comments seemed like short covering confirmed with Thursday's decline. For the week, its only advance occurred on Wednesday. On Friday as selling pressure increased, support at the 50-day Moving Average, now 4604.27, dutifully held once again. Unless it gets going today, the Santa Claus rally could be a no-show this year spoiled by Omicron.

Invesco QQQ Trust (QQQ) 384.91slid 13.10 points or -3.29%, closing Friday below the 50-day Moving Average at 386.98. Although it gained more in percentage than the SPX on Wednesday, it also declined more on Thursday, further supporting the claim that Wednesday's gain looked like short covering. Further relative weakness will likely be attributed to additional rotation out of high P/E growth stocks into consumer staples as the market adjusts to higher interest rates expected next year. Should support around the September 7 high just above 380 fails, the next stop could be down around 370.

iShares Russell 2000 ETF (IWM) 215.14 declined 4.10 points or -1.87% last week, a bit less than both SPX and QQQ after making a round trip from the November 8 high of 243.72 to Friday's intraday low of 210.30, a 13.71% retreat. It then closed 1.96 points higher on Friday. This may signal some poking around in the oversold small cap bucket of value stocks assuming market participants conclude interest rate hikes next year could be limited. Or perhaps it's just short covering after reaching and testing prior July and August lows.

CBOE Volatility Index® (VIX) added 2.88 points or +15.41% last week ending at 21.57. 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, gained 3.84 points or +27.93% to end at 17.59%.

VIX Futures Premium

VIX futures premium ended Friday at 2.52%, in the yellow caution zone with two trading days before the December futures expire and lose all remaining front month time premium vs. 12.31% on December 10.

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.

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. Last week it declined every day, ending down 131.07 points or -66.49% at -328.21, putting the few remaining bulls out to pasture. It's now at the lowest level since March 24, 2020, when it dropped all the way down to -1256.95 during the first Covid scare.

Forecasting 2022

Every year about this time, forecasts and predictions appear everywhere. It seems everybody in the business wants to get on the record just in case they get it right.

As long as Covid remains an unpredictable exogenous variable and with inflation clouding the picture, more contributors should declare they just don't know then offer some alternatives that will probably just be ignored in a week or two anyway.

Here are two of our favorite quotes on forecasting.

"There are two types of forecasters. Those who don't know – and those who don't know they don't know." – John Kenneth Galbraith

"Trying to predict the future is like trying to drive down a county road at night with no lights while looking out the back window." – Peter Drucker, Management Consultant and Author.

Strategy

Last Wednesday Federal Reserve Chairman Powell apparently threaded the needle giving market participants what they expected: increased QE taper and when to expect interest rate increases to begin. As a result stocks with high price-to-earnings (P/E) multiples and those without earnings valued on price-to-sales basis continued declining as evidenced by QQQ declining more than SPX, shown above. What happens if the Fed decides it needs to move faster in the New Year?

Quarterly expiration of options and futures typically expands trading ranges on increased volume due to position adjusting and closing activity and as year-end approaches, investment managers become more sensitive to the positions they need to report at year-end. Perhaps less high P/E growth and a bit more value. For example, this quarter the S&P 500 Index combined volume expanded to 4.4bn shares compared to 3.7bn in September.

As for forecasting, predicting and guessing about the future, devoting more time to trade strategy plans based on alternative scenarios and less time pondering forecasts will likely prove worthwhile in 2022.

Summary

Just when it seemed like the Covid Omicron variant might not cause more shutdowns the week before, last week the fear returned along with actual shut down announcements. Comments from Federal Reserve Chairman Powel after Wednesday's FOMC meeting set off a wave of buying quickly reversed the next day. Perhaps short covering explains Wednesday's rally and Omicron gets the blame for the subsequent decline. Market breadth continues deteriorating and unless the S&P 500 Index holds at support from the 50-day Moving Average, the anticipated annual Santa Claus rally could fail to arrive.