Painful volatility continues … what’s driving it … the U.S. dollar, valuations, and Omicron … where the market goes next
The rollercoaster continues…
Last week, in the wake of Wednesday’s FOMC meeting, markets surged. It was largely a relief rally based on a new awareness of the Fed’s playbook going into 2022.
Those gains disappeared on Thursday and Friday as “risk off” sentiment spread throughout Wall Street.
As I write Monday mid-morning, renewed fears of the Omicron variant and its potential for fresh lockdowns are roiling stocks.
If you’re someone who watches the market closely, this up-and-down, up-and-down (recently, mostly down) is hard on the nerves.
So, what is going on? And when will we finally return to a calmer, rising market?
On Friday, legendary investor, Louis Navellier, addressed this in a special market update podcast for his Platinum Growth Club subscribers. This morning, he sent a follow-up update.
In short, don’t overreact. This volatility will pass.
Today, let’s dive into Louis’ two updates. For anyone out there with frayed nerves, this is a needed dose of perspective and optimism.
Let’s jump in.
***Don’t read too much into this bout of volatility
For newer Digest readers, Louis is a market legend. Over the decades, he has developed a high-tech trading system guided by preset algorithms – basically, step-by-step computer instructions. It’s this use of predictive algorithms that led Forbes to name him the “King of Quants.”
Platinum Growth Club is Louis’ premium investment service. Members get access to all of Louis’ newsletters, plus a model portfolio comprised of what he considers the “best of the best” of all his recommendations.
Members also get Louis’ Flash Alerts that provide timely market wisdom and actionable insights. Per usual, his latest alerts included both.
Let’s jump in with Louis explaining the selling pressure at the end of last week:
On Thursday, the Nasdaq had a pretty stunning reversal. It looks like a lot of it was option-related. Today, (Friday) is option expiration day.
What’s really going on is the Nasdaq is retesting its December 3rd lows on light volume. And that’s all that’s going on.
In Louis’ podcast this morning, he echoed this “retesting” idea:
The stock market is going to retest its December 3rd lows again today. I’m mostly looking at the Nasdaq…
You can retest lows multiple times and bounce along the bottom multiple times. The key is trading volume. You want to make sure trading volume is light.
For greater context, below is what Louis is talking about. In the chart, you can see the Nasdaq hitting its recent low on December 3rd, bouncing, then falling again. Today, we’re retesting the level.
Back to Louis:
I do want to assure you that there’s nothing wrong out there.
The interest rate environment remains ideal. The Fed’s FOMC statement (last week) was dovish. We anticipated three rates hikes and that’s what we got.
The Fed assured us that rates would be at, or near, zero until they’re done winding down their tapering.
***The strong dollar and massive demand for Treasury securities
Louis explains that the reason the Fed can wind down the tapering is that the U.S. dollar is very strong today.
You can see this below. The U.S. Dollar Index is up 7.5% since late-May. It’s been consolidating since late November, potentially gathering steam for another leg up.
Much of this Dollar strength is due to international buyers.
Back to Louis, providing more details on this:
There is incredible buying pressure out there for our Treasury securities. In the 10-year Treasury auctions (from two weeks ago), 69% of the buyers were foreign.
There are a lot of issues around the world. China has some problems, Europe is slowing down, Germany is teetering on their growth.
The U.S. has faster growth than the rest of the world. We have higher rates and a stronger currency. It’s just a lot better here…
Relative to interest rates, the stock market is a screaming buy. It’s as simple as that.
***But what about valuation concerns?
One of the biggest concerns for stocks today is elevated valuations. Below, we look at the price-to-earnings ratio for the S&P 500.
You can see that, though recent selling pressure has brought it down, it remains at one of the highest levels in the last 20 years.
Here’s Louis’ take:
All this year, when earnings have come out, stock prices haven’t climbed as much as earnings. So, PE ratios are being compressed.
There should be no valuations concerns right now because we have a lot of productivity gains. We still have profit margin expansion. And things are looking awfully good.
***Okay, but what about Omicron-related lockdowns and the potential for new damage to the economy?
Let’s jump back to Louis:
We know the Omicron variant is spreading rapidly, but then it’s going to fizzle. Just like it’s not a problem in South Africa now.
Remember, after Thanksgiving, South Africa was the problem. But in Johannesburg, the cases have collapsed.
Omicron is more like a flu. And I know they’re closing down Cornell, Princeton, and some other places, but the truth of the matter is it’s going to be fine.
It looks like this will spike, then fizzle. Then in January, we’ll wonder what all the fuss was about.
We echoed Louis’ point last week in the Digest. The data we’re getting on Omicron is mixed. But some of it is painting a picture of a strain that, while more transmissible, is far less virulent. If that’s confirmed with more data, it would be incredibly bullish.
Professor Karl Lauterbach, a clinical epidemiologist who is in the running to be Germany’s next health minister, believes that if a milder Omicron crowds out Delta as the dominant strain, it could help end the pandemic entirely. He even referred to it as a “Christmas gift.”
***How Louis summarizes today’s volatility and what he sees coming
Back to the market update:
So, all we’re doing is retesting those December 3rd lows.
We’re going to have a big bounce.
The Fed can say they’re doing this and that, but market rates have come down – even intermediate Treasury yields.
So, the market is anticipating a dovish Fed, a very careful Fed, a very responsible Fed.
Interest rates will remain well below inflation for a long time. So, what do you do in an inflationary environment?
It’s either real estate or stocks. That’s it.
So, the stock market is a screaming buy.
Louis also reminds listeners that the largest companies in the S&P generally get about half of their revenue outside of America. So, with a stronger Dollar, they reap windfall profits.
Looking forward, if you’re looking for the best time to add money to the market, Louis says that will be next week, between Christmas and the new year.
Here’s Louis to take us out:
I expect a retest today. I expect a bounce…
I apologize that the market has to retest its low more than once, but as long as volume remains light, we’re going to be okay. And volume should be light cause, guess what, we’re in the holidays.
Hang in there, everybody. We’re going to start the new year off on the right note because there’s going to be a lot of pension funding, a lot more money coming into the market, and we’ll pop from that.
Have a good evening,
Jeff Remsburg
