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.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.