Omicron Looking Less Ominous

While Covid is increasingly perceived as permanent, each new wave in cases appears less ominous in its lethality. When the Omicron Covid variant made global headlines around Thanksgiving, the stock and commodity markets decided to shoot first and ask questions later. Oil quickly fell over 25% and stocks corrected 5 to 6%. Since the outset, Omicron  has increasingly been considered low risk with a growing sense that vaccine boosters and therapeutics would hold new infection spikes in check. The consensus for the seasonal Santa Claus stock market rally reached a crescendo in late November when Omicron surfaced and perfectly set the table for the scary 5% panic that ensued. Normally 5% is a very mild decline, especially in a Bull market that has appreciated 118% in less than 2 years. Our Exec Spec outlook at SP 4600, in our November 26th report, expected a correction low at or just below the 50 day moving average and the 5% correction level. As seen below in our updated chart below, prices bottomed in our time and price window as projected. The only surprise is that this small pullback generated one of the highest levels of fear based upon the 10 day up volume ratio, the buying of Bearish inverse ETF’s, the CNN Fear & Greed Gage, as well as very oversold sentiment data on our proprietary Buy and Sell Indicators shown here. The Chinese tech wreck and Omicron fears have subsided for now and new record highs during Seasonal highs in January are likely. The caveat here, as always, is Covid/Omicron news. Thus any retest of the recent 5% correction low (SP 4500) could trigger emotional selling to the 200 day moving average (see chart). Otherwise, the excess liquidity, robust consumer balance sheets, rapid GDP growth and oversold technical indicators should propel all major US stock indices to new highs in Q1 2022.

Negative stock market Seasonality may see one last bottom this year in the December 14th to 23rd time frame during which we would be looking for additional levels to buy stocks. Any panic retest of recent lows near SP 4500 would open up risk of  challenging SP 4300,  just under the 200 day moving average. While the US should remain the fastest economic growth engine in the Western World, Japan would be our top foreign country pick for investments in the new year. New stimulus checks and continued Bank of Japan liquidity additions along with far lower stock market price to earnings valuation will increase the odds of Japan outperforming the US and Europe. China remains in the high risk camp given the continued anti-capitalist polcies of their Government as well as threats of trade wars and even armed conflict over Taiwan and the South China Sea. 

With Oil still at $82 a barrel on November 11th, Exec Spec targeted a December Seasonal low near $70. In our November 26th report we further eluded to a lower technical potential between $54 and $68 (midpoint=$61) in December to begin buying Oil and energy stocks. Reviewing how this manifested, the actual lows came in at $62 and $65.5 on a closing basis in early December after a significant 28% panic. We based our extreme short term Bearishness upon the over optimism among analysts/hedgers, Seasonal weakness and inventory accumulation. Government release of supplies form the Strategic Petroeum Reserve had no effect upon price as invstors saw throug the public relations attempt. Our longer term view remains Bullish with new highs above $85 in the first half of 2022. While winter Covid spikes and curtailment of air travel can delay or subdue our expected energy Bull market next year, we would not be surprised by $80 to $86 Oil as early as January. 

Short term Seasonal dips under $70 to as low as $66 before Christmas should be considered a buying opportunity for the energy sector (XLE, CVX and PXD). As usual, the unpredictability of Covid and related mandates can affect the outlook, but supply chain bottlenecks, rising consumption and hostile Government actions discouraging supply expansion should all conspire with Seasonal uptrends to push Oil to new 7 year highs.

Interest rate forecasting by virtually every analyst has been far off the mark throughout 2021. Record economic growth and multi-decade highs for inflation had everyone looking for rising interest rates. Yet rates were flat to lower in 2021 staying in a range of 1.12 to 1.75% basis the benchmark 10 Year Treasury. Exec Spec has refrained from calling for a breakout in yields this year until Covid mandates are rolled back. Today we had yet another new 29 year inflation report with a 6.8% CPI. On the surpising news Bond Yields fell and the Dollar rose, exactly opposite of what forecasters would expect as these markets continue to see inflation as a transitory Covid phenomenon. Inflation will subside when Covid fears and mandates recede. We have been surprised by the persistence of this pandemic and corresponding service sector repression. Investors should expect sideways to lower interest rates over the next month in the 1.3 to 1.55% zone on the 10 Year. In our 11-26-21 report with yields above 1.5%, we gave a narrow time and price window centered around a 1.4% yield by month end, which did occur. After rates bottom in January we expect an upward trend towards 1.8% in the later part of Q1 as the Fed tapering of Bond buying accelerates and the odds of improved Covid treatments reduces travel mandates.

With US virus cases and fatalities reversing to an uptend in December, Covid and its many variants remain a fulcrum affecting economic policy and investment behavior. We would aver that treatments and a more salubrious conduct among high risk populations will finally quell the tortuous nature of Covid enough to ease inflationary supply chains in 2022. When the service economy is finally able to open up next year without the multitude of mobility mandates, that is the time we would expect the most serious stock market correction to occur since the Bull market began. For now, the next few months should extend this record Bull market run.

 

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