Our View
New Covid-19 Restrictions
US health officials are warning the Omicron variant is likely to strain hospitals, shut down restaurants and businesses while slowing air travel and supply chains in the coming weeks.
European nations are setting restrictions. Germany’s travel restriction applies to all residents of the U.K., Northern Ireland, the Channel Islands, and all British overseas territories. Denmark, France, Norway, and a handful of other countries are now considered high-risk areas.
The U.S. is now averaging more than 125,000 new Covid-19 cases a day and hospitalizations are rising. The seven-day average has more than 7,600 new admissions a day, while deaths have jumped to over 1,100 a day. There’s a shortage of Covid-19 tests and the infections are rising exponentially.
This has impacted the S&P and the global markets as a whole, in my opinion.
When I look at the best trade during the Christmas holiday, it is the Santa Claus rally that comes in the final five sessions of the year. My idea was to try and catch it early and hold while the ES pushed higher, but it’s been bush-whacked by omicron and central bank rate hikes.
The ES notched its first weekly decline in three weeks and the Dow has closed lower in five of the past six trading sessions. The Nasdaq had an 800-point range for the week and at one point, it was down more than 200 points on Friday.
Our Lean
Our lean, the news is not good. The stock market is getting bombarded by the covid headlines while trying to fight off the Fed. The ES short-covered slightly late last Friday, but I think we could see lower prices Sunday night into next week.
Right now I am flat and want to get a look at the price action before doing any trading. My guess is if we open down, we will rally in the first part of the day but I don’t think the rallies will hold.
Below are the highlights of Marco Kolanovic’s year-end and beginning-of-the-year view. I think he is one of the top bank analysts.
“We still think that the market will move higher into the year-end.”
“Appropriate exposures may be high-beta indices such as Russell 2000 and MSCI Emerging Markets.”
“As the President cannot count on Congress or the Fed for more easing, he will need to do what is in his power to keep the economy rolling — drop the damaging trade war and turn it into a winning deal.”
He also called for “a decline in volatility easing, ‘systematic’ selling, increased buyback activity and strong earnings.”
S&P Recap
The S&P’s inability to hold the rallies showed through all last week. It gapped higher on Monday and was sold lower. It gapped higher again on Thursday (and the futures even hit new all-time highs), but again the index was sold lower.
Each step forward is followed by two steps back.
After a late short-covering rally on Thursday, the ES sold off on Globex early Friday morning. On the 9:30 ET open, the ES traded 4624.25, dipped a few points then rallied up to 4633.25.
From there, the ES then dropped 25 points down to 4608.50 at 9:39, while Nasdaq tumbled as well. After some small back-and-fill, the ES remained choppy. It dipped to new lows at 4602.50, rallied back to 4628, then dipped back down to 4604 just after 10:00.
The opening hour of trading was choppy and directionless — just as one would expect for a quad-witch expiration.
Just after 10 am, the ES broke down to new lows at 4590. However, when it reversed back up through the week’s low near 4596, several traders in the MIM chat room were calling out long positions.
That reversal allowed the ES to rally 67 handles to a high of 4657, but the rally to this week’s VWAP halted it in its tracks at 11:10. Just after noon though, the ES had traded back down to 4607.50.
We had nice ranges to trade — if traders could stomach the back and forth.
From the 4607.50 low, the ES climbed to 4629, then fell to 4617.50 and climbed back up to 4636.50. It dipped to 4620 just after 1 pm, then climbed to 4640 at 2:30.
Do you see what I mean?
At 3:34 the ES traded down to 4615 and rallied back up to 4628 as the early MIM showed $1.7 billion to sell, then sold off down to 4607.75 after the 3:50 cash imbalance showed an even larger $2.1 billion to sell.
The ES traded 4608 on the 4:00 cash close, climbed to 4620.75 just before the 5:00 close, and settled at 4619.25, down 46.50 points or 1% on the day. For the week, the ES fell 2%.
In the End
In the end, the bears failed to put the S&P away. It was an absolutely wild day of 40- and 50-handle swings in the ES and 100- and 200-point moves in the NQ.
I know some of you do not subscribe to the premium edition of the Opening Print but I am always willing to share. I am not sure this decline is over, but the more protection/hedging and short selling that is added on will only cause a larger, faster short-covering rally.
In terms of the ES’s overall tone, it was weak and hanging on an edge several times. In terms of the ES’s overall trade, volume was high at 2.47 million contracts traded.
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
Technical Breakdown
- NYSE Breadth: 60% downside volume
- NASDAQ Breadth: 58.5% upside volume
We’ve made it through the Fed, which turned more hawkish, and we’ve made it through quad-witch expiration.
Despite investors’ assumption that this week (the 51st calendar week) comes with positive sentiment, the SPY has only finished higher 55% of the time since 2002. Conversely, the following week — the “real” Santa Claus rally — is positive 68% of the time over the last 19 years.
We’ve had a lot of down days lately, with the S&P lower in four out of five sessions last week. That said, it’s acting fairly resilient when we consider:
- A new Covid variant (and the economic implications that come with it)
- A more hawkish Fed (the biggest issue, in my opinion)
- Decimation of growth stocks — ARKK
- High inflation
There are positives and silver linings to the above, but at one point we have to ask, does the S&P need to correct in order to account for these issues?
It’s still up 23% for the year and could probably use some rest. Its resilience is impressive and as for the silver linings, I could argue:
- Omicron may be more transmittable, but also more mild
- The Fed still remains dovish overall, just less so than before
- Growth stocks may be at or near a bottom
- Inflation may be at or near a peak
The Game Plan
There are some good-looking stocks and we are going to continue trying to trade the setups that work.
The key here is not to force anything.
The last thing any of us want to do is screw up badly and/or break our trading rules with just a handful of trading sessions left in the year. No one wants that bad taste in their mouth going into 2022 and the holidays.
So keep that in mind when you’re sizing up your trades:
Does this trade fit my style and is it a high-quality setup? Do I have an edge?
S&P 500
We have a series of “lines in the sand” when I look at the daily S&P 500 chart.
Working from the top down, resistance at 4720 remains firm.
4665 remains a pivot. If above, we want to see the S&P hold this level. If below, bulls want to see it reclaimed.
On the downside, 4600 is key support. There it also finds the 50-day moving average. If we break this level and can’t reclaim it, I think we may be looking at a test of the prior week’s low (not last week’s low) and the prior breakout area, with both near 4550.
On the upside, a move through 4665 is key. Not only has this level been critical, but it will also put the S&P back above the 10-day and 21-day moving averages.
If 4665 is resistance, the S&P remains vulnerable.
ARKK
If we look at the daily chart of ARKK, it’s all over the place. Big up days and big down days. Is it trying to bottom? That’s the damn hope.
Rather than a daily chart though, above is a look at the weekly. As you can see, it was one of the highest-volume weeks of the year — and the highest volume since it’s low in May.
We have an inside week on ARKK. Down 2% in pre-market trading is a tough start to the week, but if bulls buy the dip and send this one weekly-up over $97.50, it will be hard to ignore.
In that scenario, it would put last week’s high in play near $104, followed by the 10-week moving average. On the downside, a break of $89 is a very bad look, especially if it’s not quickly reclaimed.
Individual Stocks
As far as individual stocks go, there are still a few attractive setups in play.
We’re still watching P&G for a pullback and may get the 8/10-day test on Monday morning.
This is one of those scenarios where, if we buy the dip and it doesn’t work out, there are no regrets.
The stock has simply been too strong to ignore and we’re not going to start ignoring it on its first reset.
ABBV
Similar to P&G, AbbVie has been on fire. We want a piece of this one on a dip.
PFE
Pfizer was a monster performer for us last week. In fact, it’s a big part of the reason we were able to take such a relaxed approach to the week, as we hit this one hard on Monday (along with that bearish reversal in Apple).
I was considering a move to $55 to be “lucky” by the end of the week, but Pfizer ended up rallying above $61.
UNH
UnitedHealth Group is a similar setup to those above. It’s on watch for a buy-the-dip setup.
Disclaimer: Charts and analyses are for discussion and education purposes only. I am not a financial advisor, do not give financial advice, and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!
Economic Outlook
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