1. Moving the markets

After wild rides in the markets last week, which saw early rallies wiped out later in the session, we finally witnessed an opening surge that improved throughout the day and did not peter out in the afternoon. Sure, momentum slumped a little into the close, but that can be expected.

In the process, the Dow managed to erase all last week’s losses, while the S&P 500 just fell a fraction short. MarketWatch summed up today’s influencing forces like this:

• Shares linked to the economic reopening gained in Monday trading, including energy, industrials, and airlines.
• Investors continued to sell tech stocks with relatively high valuations. Those shares dragged the market down to a losing week on Wall Street last week.
• The 10-year Treasury yield rebounded after falling last week amid the omicron threat.
• There’s a major shift underway at the Federal Reserve to bring about a faster end to its pandemic easing policies.

The Nasdaq lagged the other two major indexes as the health care and tech sectors were weighing down the indicator, with Moderna being the biggest decliner by shedding 15%.

Anxiety about the new Omicron variant remains, despite continuous reports of its symptoms being less severe, but fearmongering in the MSM seems to be always in high gear. It appears that any economic data are playing second fiddle to the latest headlines dealing with Covid 19 or its variants.

Finally, the short squeeze came back to life again, after being suspiciously absent during last week, and gave a much-needed assist to insure the rebound would not run out of steam.  

Bond yields surged after an early dump, with the 10-year eking out a small gain and closing the session at 1.48%. The US Dollar went sideways for most of the day but ended up higher by a modest 0.19%.  

Gold drifted lower after Friday’s strong rebound with the precious metal giving back 0.24%, while still attempting to permanently conquer its much fought for $1,800 level.

I expect the recent volatility to stay with us, especially when on Friday the much-anticipated US CPI will be released.

1. Moving the markets

The first couple of trading hours were hopeful with the Dow jumping ahead over 300 points indicating that recent volatility had subsided and traders assuming that we’d be well on our way to the much-anticipated Holiday finish.

Those hopes were dashed suddenly, when the bears took the upper hand and pounded the major indexes into oblivion with the Dow ending the session down over 460 points, which means the index covered a range of almost 800 points. The S&P 500 and Nasdaq followed suit with the latter suffering the worst loss.  

This moment of reality was caused by reports that the Omicron variant had arrived in the US. Of course, the MSM used that event for more fearmongering, but the real negative came from the Fed’s Williams:

“Clearly, it adds a lot of uncertainty to the outlook,” Mr. Williams said of the new variant. He later added that a risk with the new variant is that it “will continue that excess demand in the areas that don’t have capacity and will stall the recovery in the areas where we actually have the capacity.”

That, he said, would “mean a somewhat slower rebound overall” and “also does increase those inflationary pressures, in those areas that are in high demand.”

On other words, the dreaded “S” word, as in stagflation, has moved front and center again and sent equities on a southerly path. Bond yields reversed their recent northerly trend with the 30-year settling back below 1.79% last seen at the beginning of this year.

The US Dollar dipped and ripped but ended the session unchanged, which helped gold to stay in the green. After giving back some of its early gains, the precious metal managed to advance 0.38%.

Our Domestic Trend Tracking Index (TTI) is now rapidly approaching its trend line from above and is in clear danger of breaking it to the downside. Please see section 3 for more details.

1. Moving the markets

First, there was more fearmongering, as Moderna’s CEO raised doubts about the efficacy of the current batch of vaccines versus the omicron variant. That took the starch out of any bullish momentum and pulled the major indexes down.

Second, in a lesson to all economic hacks, Fed head Powell destroyed the long-held view that inflation is transitory by announcing the following:

“The economy is very strong and inflationary pressures are high and it is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases…perhaps a few months sooner,” Powell said, during testimony to the Senate Banking Committee.

Suddenly, the “transitory” inflation narrative, which I have countered all year long, came not only apart at the seams but as a total shock to traders and algos alike. Market reaction was fast and furious with the Dow dropping from barely being in the red to down 500 points within a minute, with the other indexes following suit.

In the end, the sell-off was broad and deep with no place to hide. Even gold, up some 1.25% early on, got hammered and closed lower by a moderate 0.48%, despite the 10-year bond yield sinking by 5.6 basis points to 1.44%.

The US Dollar resembled the chaotic activity of a penny stock by dumping, pumping and fading into the close.

We have now reached a point where the above narratives could very well continue and end this current bullish market cycle. As I posted before, the International TTI has at times been the canary in the coalmine by forecasting the fate of domestic equities. Please see the latest numbers in section 3 below.

Some trailing sell stops are close to being executed, and I believe that market action over the next few trading days will be indicative as to whether there will be a directional change or not.

Stay tuned.