Covid B.1.1.529 Infects Stock Market and Oil

The new Covid variant, labeled B.1.1.529 out of Botswana, has barely infected any nation, but the stock and Oil markets are beginning to anticipate this virus going global. While Europe and Asia are already expanding social restriction mandates and harsh lockdowns from the spread of the Covid Delta variant, the news of this new Covid mutation called Omicron has 30 mutations with increased odds of evading today’s vaccines. Fear is infecting financial markets like – a virus. The panic today appears to be climactic short term, but with the weeks needed before our drug giants can opine upon the effectiveness of old vaccines and the 100 days needed for possible new Omicron boosters, it seems unlikely the Santa Claus stock market rally has any more  energy for running back to all time highs before Christmas. With fears of economic lockdowns and travel cancellations abounding, banks, and the laggard travel/leisure stocks will remain as portfolio liquidation targets until medical optimism returns. Our medium term weekly indicators had mostly entered the overbought zone over the past couple of weeks and are quickly approaching oversold levels. The 5% and 50 day moving average (dma) should be considered a magnet for modest short term support. Should prices correct below these levels shown below, then the 10% and 200 dma will become the next magnet for prices where investors can become more serious about increasing their portfolio exposure to equities.  Short to medium term portfolio buying can begin when our indicators enter their oversold buy zone (see chart below).

A closer look at the broad SP 500 Index daily chart along with Seasonal trends had expected the November rally. However, the upward Seasonality was cut a week short by the new Omicron virus scare today and traders will now be looking at the 4 to 5% correction support due early next week as the first stop to gauge Covid sentiment and the Governmental response. Should this first support zone near 4500 SP break (see chart below), then  fear factor liquidation may push prices lower into the mid-December Seasonal weakness closer to the 200 dma. Should prices rebound, closing above 4650’s on the SP, then the panic is over on a technical basis.

For traders looking at the micro charts such as the 60 minute bar chart below, overbought momentum signals and Thrust windows were looking for a pullback today that has quickly moved into the oversold zone for Day traders. 

The Covid variant has already caused analysts today to revise lower the number of Fed rate hikes and tapering of Bond buying in 2022 due to the new risk of slower economic growth. Travel, social restriction mandates and total country wide lockdowns are spreading with the older Delta wave of Covid this week. The calculus is that, if this new Omicron variant proves to be vaccine resistant, then even more widespread economic lockdowns will spread to the US. It’s far too early to know how contagious or vaccine resistant this new variant is, but for the very short term it’s unlikely interest rates can resume their rally that would signifiy a reopening of the global economy. Next week we expect a test of the 1.4% yield level or lower on the 10 year Treasury. Until drug companies can analyze this variant, there is room for yields to fall further. Unfortunately, this will be a significant headwind for stocks of banks, financials, industrial, travel/leisure or any reopening sectors. In a low rate environment tech leads and we once again have to be patient in waitng for extreme oversold conditions to add cyclical and small cap stocks to a portfolio.

In our November 11th newsletter we forecasted a drop in Oil until their end of November. Our outlook for as low as $71 Oil basis December ($68 level basis January) for November was on target. Now we would view the current fundamentals and exogenous factor of new Covid risks as increasing the odds of a lower price bottom into the mid $50’s a barrel to mid $60s price zone during the Seasonal low window in mid-December. 

While some energy sector stock buying can begin early next week, more aggressive additions to the portfolio should be considered as we enter the mid-December time frames. When oversold, PXD and COP are top energy picks. Longer term we expect energy to rebound in 2022, assuming the current or new vaccines (due in April 2022) supress new Covid fatality waves. The Government induced curtailment of petroleum based energy infrastructure investment should keep Oil and Natural Gas on the upswing once this winter consolidation ends and Covid mandates ease. The good news is that the incessant alarm of inflation should calm down in December along with lower gas prices at the pump.

 

 

 

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