A rollercoaster week for stocks … is this time different? … what historical data suggest about where the market will be in a month
A quick correction before we jump into today’s Digest.
Yesterday, we invited readers to attend a special, live event next Tuesday at 7 PM ET with Louis Navellier, Eric Fry, and Luke Lango called the Early Warning Summit 2022.
My apologies – we allowed a typo to slip through. Next Tuesday is the 7th, not the 17th as we published.
If you missed yesterday’s Digest that introduces the event, you can click here to read it.
In short, there are many issues overhanging today’s market. But they all reduce to one central question…
What’s the best way to position your money as we head into 2022?
Even though Louis, Eric, and Luke all approach the markets from unique perspectives with their own investment styles, they’re all in agreement on a series of steps investors should be taking today.
Next Tuesday’s Early Warning Summit 2022 dives into all the details.
Again, it’s next Tuesday the 7th at 7 PM ET. It’s a free event covering what these experts see coming for the markets, what to do about it in your portfolio, and far more. Click here to reserve your seat.
On to today’s Digest…
***You can’t blame anyone who’s feeling motion sickness from this week’s volatility
On Monday, stocks rebounded from Black Friday’s carnage on. The S&P 500 recovered more than half its drop from Friday, surging 1.3%.
On Tuesday, that rally crumbled. The S&P 500 lost nearly 1.2% as Federal Reserve Chairman Jay Powell spooked markets with his hawkish policy comments. This resulted in the S&P closing below its 50-day moving average for the first time since Oct. 13.
On Wednesday, stocks went through a massive whipsaw. The Dow surged in the morning, only to drop roughly 1,000 points by the closing bell, going from “up 521” to “down 461.” This was due to fears about the new Omicron strain of Covid-19.
Yesterday, the markets exploded higher, as “buy the dip” came back in force. The Dow ended the day up 1.8%. Even the laggard, the Nasdaq, tacked on nearly 1%.
As I write Friday at noon, stocks are getting destroyed. The Nasdaq is leading the declines, off 2.8%.
Here’s how this rollercoaster looks (showing the S&P):
What is this manic market telling us?
Is it just noise to be ignored, or is it signaling a material change in conditions that requires a similar change in our investment strategy?
Today, let’s see how our expert traders, John Jagerson and Wade Hansen are answering this.
After all, reaching your long-term investment goals requires staying in the market. And the odds of staying in the market improve when we have an idea of what to expect, why, and how long it might last.
Today, let’s get those insights from John and Wade.
***This current volatility shouldn’t have been that much of a surprise
For newer Digest readers, John and Wade are the analysts behind Strategic Trader, InvestorPlace’s premier trading service. It combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
To identify profitable trade set-ups, they analyze a variety of data points, ratios, chart patterns, indicators, and global markets. Together, all of this offers clues about where the market might be going. That’s why our current volatility wasn’t a surprise for John and Wade.
From their Wednesday update:
As we discussed a few weeks ago, there were early warning signs that volatility was likely to pick up for a short period.
We’ll continue to watch the high-yield bond market for signals that there may be some risks stock investors are ignoring.
As you can see in the following chart, junk bond traders [as represented by the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)] were selling while stock traders were buying prior to this most recent drop.
A divergence between high-yield bond investors and the major stock indexes is a good predictor of short-term volatility. However, this is usually a short-term phenomenon.
John and Wade expand on this “short-term” characteristic. They ran a back-test, noting that since the financial crisis, the S&P has fallen more than 2% in a single trading session 107 times.
Now, take a guess. Of those 107 times, on how many occasions did the market go on to be higher than its pre-drop level within 30 calendar days (20 trading days)?
Got your answer?
John and Wade tell us it’s 75.7%. So, it’s understandable why they write “there is a very good chance the S&P 500 will be trading above $4,675 by December 30.”
***But is this time different?
Let’s jump straight to John and Wade:
In a situation like this, we usually get questions about the unique factor that is driving the market lower.
In this case, that is the Omicron variant, but there is always something that represents a big unknown that triggers large one- or two-day drops.
What would make us much more concerned about the short-term prospects for the market is a change in fundamental growth numbers. So far, expectations for earnings in the fourth quarter remain stable and positive.
However, if travel restrictions and lockdowns in Europe start to become more severe, we may have to adjust our expectations.
On that note, let’s hope that calmer heads prevail.
The reality is the Omicron strain is already spreading. As I write, the latest news is that cases have been found in California, Colorado, Minnesota, and New York.
Plus, our experience with the spread of the Delta strain suggests trying to “lock out” the virus isn’t especially effective.
This isn’t just my personal opinion – the World Health Organization recognizes the shortcomings in that approach.
From Sky News:
The World Health Organization has also urged countries to apply “an evidence-informed and risk-based approach” to travel measures, saying blanket bans will not prevent the spread of the new Omicron COVID variant.
This perspective is also supported by Dr. Angelique Coetzee, the South African epidemiologist who first identified the Omicron strain.
Asked by the BBC’s Andrew Marr whether countries like the U.S., U.K., Israel and EU were “panicking unnecessarily,” Coetzee stressed that the omicron variant had already likely spread to those nations.
“I think you already have it there in your country without even knowing it so I would say at this stage, definitely. Two weeks on, maybe we will say something different,” she added.
Finally, keep in mind, despite Omicron’s potential for higher transmissibility rates, the current research suggests its symptoms are “mild.”
Detailing the difference between the Delta and Omicron variant of COVID, the South African doctor (Coetzee) stated that relatively milder symptoms were observed in cases of Omicron.
“The biggest difference between the two is that Delta will give you loss of smell, loss of taste in most cases. They will come in for fever, have an elevated pulse rate, and lower than normal oxygen levels. In Omicron’s case, oxygen stays normal, there is a very slight increase in pulse rate and no loss of smell. Only a scratchy throat and generally not feeling well for 1-2 days. They get well in a few days, even if you are vaccinated, it is still mild,” she said.
In any case, hopefully, encouraging data continue to emerge, travel bans lift, and the global economy accelerates.
However, John and Wade do find a silver lining in all this:
(The Omicron variant) makes it easier for the dovish Fed to justify a stall on tapering the bond purchase program, or at the very least, it is less likely for the Fed to raise rates or accelerate the tapering program.
During the last QE tapering campaign in 2014, bad news was often seen as a positive for the market because investors expected the Fed to focus on economic growth rather than holding back inflation.
For example, the big rally from February to March of 2014 was kicked off by a terrible U.S. manufacturing report.
***The bottom line on how to respond to this week’s craziness
Coming full circle, how should we respond to this manic market?
In short, even though it’s tough, stay the course for now.
Nothing about this latest volatility represents a truly material change in the primary drivers of today’s market. Earnings are still respectable, the economy continues to rebound, and we have a reasonable idea about upcoming Fed policy and timing.
Here’s John and Wade to take us out:
For now, we recommend sticking with the trend of the underlying fundamentals (positive) and the historical data that are both pointing towards higher prices by the end of the year.
Have a good evening,