VIX’ed

Last week demonstrated how lower volume and a little conviction can make for a nasty time in the markets.

The holiday shortened week, in and of itself, was neither new nor unexpected. Most market analysts expect lighter trading as turkey carving carves into market time. The thing is, the lighter trading volume can magnify market trends.

When you have fewer participants in a market, prices can move more violently because there are fewer traders vying for position. If a strong conviction comes along, and participants want to buy or sell, there are literally fewer participants making the market. So price discovery can get more choppy.

This was extremely evident on Friday when the VIX shot up close to around 40 percent. Just a few short days earlier (Monday) the S&P 500 had pushed to an intra-day all-time high. Then, with markets closed on Thursday and abbreviated on Friday, we received news of the Omicron variant of everyone’s favorite Covid virus.

Markets promptly lost their minds and coughed up over 2% for the major indexes. The headlines and search engine queries also spiked as people began searching for information and a sense of what the new variant could mean.

Travel restrictions ensued. States of emergency were declared in some instances. Social media got a hold of it. And before you know it, fears of new lockdowns were the talk. And, with fewer participants to take the other side of the argument, the markets dropped… fast.

As of Monday morning futures are indicating a bit of a recovery rally. The technicals are also far less concerned than the headlines. While the market drop definitely impacted the up-trend, the pull-back has stayed within a typical range. There is significant support at the 50-day moving average for the SPX, which sits around 4527, less than 1.5% lower than Friday’s close.

The black swan is the Omicron variant. It’s a bit early to know what’s going on there. True enough, if we’re headed for more lockdowns, that would be a terrible thing for the markets. But, odds are, this is not the case. South Africa has been largely cooperative and the spread appears somewhat mitigated so far. But this is the wild card.

Assuming suspicions about Omicron are overstated, the markets should get back on track this week and head back above 4700 on the SPX. The end-of-the-year rally is not yet derailed. We’ll have to wait and see how the news evolves thought. If any kind of significant travel restrictions hit, we’ll re-evaluate.

For the week, look for SPX support at 4527, and resistance at 4575-ish. Bias should be to the up-side.

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