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Will Rising Omicron Fears, Cases Torch the Santa Rally?

by | Dec 16, 2021

J-POW giveth… and COVID-19 taketh away.

Federal Reserve Chair Jerome Powell bowed to the market gods on Wednesday and said, “Yes, masters, I shall obey you and not raise rates in deference to the Santa Rally.” 

And for a moment there, it looked like our stock market Santa Rally of 2021 would go off without a hitch.

Thursday, however, the volatility gods woke up and said… 

“Not so fast.”

In the end, the Fed always wins out, so fading this pullback — partially driven by surging COVID-19 cases — is the prudent thing to do absent any other information.

But there are other factors adding fuel to the fire…

First off, monthly options expiry is Friday, and there is still plenty of juice out there to keep things choppy and interesting.

But it’s also worth pointing out the market is pulling back from another all-time high.

Source: Bloomberg

So at least some of this is just good old-fashioned profit taking… I can’t blame folks for that!

Before I dissect the latest media sentiment, let me say I completely understand that folks are concerned about rising COVID-19 cases.

Where I live — in the Washington D.C./Baltimore area, cases are surging in schools…  My daughter’s school wisely just went virtual for the last few sessions of the year rather than risk an outbreak.

Hospital beds are also running over 90% capacity across the state. And though just 15% are COVID-19 cases, those are rapidly filling the remainder.

So it’s serious enough to warrant some coverage like Bloomberg’s…

Source: Bloomberg

But CNBC is — of course — taking it one ridiculous step further with the clickbait.

Source: CNBC

Never seen this before?!?

Last year it was “apocalyptic.”

Give me a break.

Will the Stock Market Santa Rally of 2021 Live On?

Here’s the kicker… immediately below that clickbait is a fantastic, positive headline that says the omicron variant is more transmissible… but less deadly.

That’s exactly the kind of evolution we’ve been waiting for… one that can reduce severity of illness to the point where it transitions from pandemic to endemic.

So I’ll say it again: From a strictly economic perspective, omicron does not seem concerning. I doubt it will be able to crush the Santa rally of 2021.

Even the most disappointing data from this week — headline retail sales — had a positive takeaway.

While month-on-month data came in well under expectations, analysts failed to take Thanksgiving into account.

Even better, when we look at retail sales on a year-on-year basis, they actually went up.

Source: Bloomberg

Economic data Thursday was mostly positive as well. Unemployment data remains low, and housing starts are absolutely on fire.

Source: Bloomberg

The one hiccup was in the Philadelphia Fed Business Outlook, which came in way under expectations… with a staggeringly low figure for new orders.

Source: Bloomberg

That’s a bad number.

But keep in mind that new orders are a leading indicator. It tells us what future sales are going to be, not what sales are now.

In general, it takes about two to three months to work its way through the system — meaning late February or early March could see a big economic slowdown.

That was one speculative reason — the other being the Fed — why we pivoted to a small watchlist on Tuesday. That one is all green now so if you picked up any of those Wednesday, selling some is the right move. Updated figures below.

Source: Bloomberg

But with the dip being gifted back to us and an interest rate hike nowhere in sight until March, it’s back to our old watchlist.

Source: Bloomberg

And in this one, names like RH Inc. (NYSE: RH), PVH Corp. (NYSE: PVH), Coinbase Global Inc. (Nasdaq: COIN) and Rivian Automotive Inc. (Nasdaq: RIVN) are all on sale.

So until the economy turns over for real, we nibble on weakness here as we get ready for a stock market Santa Rally in 2021.

And given the strength we saw in housing data, we’re adding one more — the iShares U.S. Home Construction ETF (NYSEArca: ITB) — which is this week’s BONUS TRADE!

Again, Friday is monthly options expiry, so keep it small at first and size up if the market dies into the close.

Stay frosty!

All the best,

Matt Warder

Fortune Research

WRITTEN BY<br>Matt Warder

Matt Warder

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