Omicron and the Fed
The stock market has declined as worries about the Covid-19 Omicron variant continue to weigh on the mindsets of investors. Comments from Fed Chairman Powell regarding rising inflation and the winding down of the stimulus programs at a faster pace are also not helping the market.
The variant may be greater of the two concerns to investors.
Some are saying the Omicron variant could be a game-changer as the path of the new variant can take a dramatic turn. Under a worst-case scenario, it can lead to another lock-down, triggering the next economic recession. Even under the more favorable circumstance, the fear of the spread of Omicron could slow down spending into the critical holiday season.
Most importantly, the virus can put further pressure on the pandemic-disrupted supply chains. With countries instituting tighter border controls and restrictions, the current supply bottlenecks will further constrain output and drive the cost of raw materials and labor prices higher.
Policymakers faced the challenging task of managing an economic recovery while at the same time taming inflation.
Will Omicron and the Fed kill a year-end Santa Claus rally?
Although Wall Street may be throwing another taper tantrum, as evidenced by the sharp reversal day today, investors need to keep in mind that it has been another stellar year for stocks so far.
Despite the recent market setback, the S&P 500 Index has appreciated 20% year-to-date, the Nasdaq Composite Index has gained 18.35%, and Nasdaq 100 Index has rallied for 23% this year. Investors fortunate to be situated in some of the mega tech names such as AAPL (+25% YTD), MSFT (+49.6%), GOOGL (61%), and TSLA (+55%) have dramatically outperformed benchmark indexes this year.
Given the uncertainties and the changing dynamics of the Omicron variant and the weakening near-term technical conditions in key market indexes, it would not surprise us to see an increase in market volatility over the near term.
Even before the selloffs over the past week, market breadth trends have deteriorated, investor sentiments have been overly optimistic, overbought readings have developed across key indexes, and low-quality or speculative markets have fallen more than large-cap indexes. Market volatility continues to be unsettling as the VIX Index is close to confirming a breakout above its key near-term resistance at 29-31.
However, an overbought condition is also developing into the recent sharp VIX rally and a peak in the implied volatility can solidify another market bottom. Also, the recent market setback has alleviated an overbought market condition. Favorable seasonality factors continue to be in place for another near-term market rally.
Nonetheless, benchmark equity indexes are now flirting with key support thresholds. Some indexes are nearing the pivotal 50-day ma, key retracement zones, or a prior technical breakout. Others are approaching the critical 200-day ma, the bottom of an uptrend channel, or Sep/Oct 2021 reaction lows.
Listed below are key technical supports for SPX, INDU, NYA, COMPQ, and NDX:
S&P 500 Index (SPX – 4,513.04)
Key support = 4,437-4,546 (-4.17% to -6.47% from 11/22/21 all-time) = Bottom of the Mar 2021 uptrend channel, 10/22/21 breakout, 50-day ma, and the 50%-61.8% retracement from 10/4-11/22/21 rally
Dow Jones Industrial Average (INDU – 34,022.04)
Key support = 33,272-33,785.5 (-7.60 to -9.0%) = 6/18/21, 7/19/21, 9/20/21m, and 10/1/21 lows
NYSE Composite Index (NYA – 16,1333.89)
Key support = 15,955-16,094.5 (7.31% to -8.12%) = 5/12/21, 7/19/21, 9/20/21, and 10/1/21 lows
Nasdaq Composite Index (COMPQ – 15,254.05)
Key support = 14,723-15,403 (-4.99% to -9.19%) = 10/28/21 breakout, 50-day ma, the 50%-61.8% retracement from 10/4-11/22/21 rally, and the bottom of the Mar 2021 uptrend channel
Nasdaq 100 Index (NDX – 15,877.72)
Key support = 15,042-15,701 (-6.35% to -10.28%) = 10/28/21 breakout, 50-day ma, the 50-61.8% retracement from 10/4/21-11/22/21 rally, and the bottom of the Mar 2021 uptrend channel