Stocks fell slightly this morning following yesterday’s massive, market-wide rally. Many analysts incorrectly pointed to waning Omicron variant fears as the cause of the rapid “melt-up.” In reality, though, a short squeeze drove most of yesterday’s gains.
Equities endured two weeks of intense short-selling, beginning in late November. “Smart money” traders (aka Wall Street) went short to the extent that short sales actually outnumbered long sales (investors exiting long positions) 9-to-1 according to a report from Goldman Sachs.
Yesterday, shorts started to cover their profitable positions, causing virtually every other bear to do so the same. This resulted in a blast higher for nearly every sector that stalled shortly before noon.
Today, on the other hand, stocks refuse to budge. And that’s not at all surprising given what caused yesterday’s major move.
“Investors have been conditioned by market history to get long, stay long, and on any sell-off, to get longer. This last sell-off and powerful rebound just reinforced that lesson yet again,” said Mike Zigmont, Harvest Volatility Research’s trading chief.
“The two rallies that we had on Monday and Tuesday were so strong and they were back-to-back that even for the most bullish of the bullish, you’ve got to take a pause.”
It also should be noted that bears exiting short positions – not bulls entering long ones – likely provoked most of yesterday’s gains. If that’s true, then it may also explain why stocks haven’t continued to rally this morning. There aren’t many bulls around to keep the positive momentum going. Conversely, most bears seem to have left the building, too.
But most analysts still believe the market has a bright future, even with an FOMC meeting (in which an accelerated taper will be discussed) approaching on December 15th.
“We do think that there is fundamental support there for markets to continue to move higher here,” said Emily Roland, co-chief investment strategist at John Hancock investment management.
“Obviously we had a couple of things spook us over the last week or so, the emergence of the Omicron variant as well as this pivot from the Fed, potentially seeing them accelerating their tapering of asset purchases here. But the bottom line is that the economy is strong.”
Roland finished by adding:
“Until it looks like [the US is] inching closer to a recession […] which we’re nowhere near at this point, it’s hard for us to get too defensive.”
Roland touched on a very important issue that has been a hot topic of debate over the last several months. Most economists seem to think the US is on a positive trajectory, economically speaking. But a vocal minority believes a recession is right around the corner. Skeptics say that a hawkish shift in monetary policy (in response to rising, “red-hot” inflation) would spark an economic slowdown.
So too would new pandemic-induced lockdowns, many of which have already reappeared in countries around the world as Covid cases tick higher once more.
“Certain features of Omicron, including its global spread and large number of mutations, suggest it could have a major impact on the course of the pandemic. Exactly what that impact will be is still difficult to know,” said WHO director-general and noted China-shill Tedros Adhanom Ghebreyesus just a few hours ago.
That means, as usual, inflation and Covid lockdowns will dictate the market’s short-term trend. As mentioned previously, the December FOMC meeting is coming up on the 15th. Should the committee decide that it’s time to accelerate the ongoing taper (to fight rising inflation), the market may react poorly to the news. A similar response would occur should new lockdowns go into effect in the US – both of which could drop the S&P to its December lows, if not even lower.