Why The Omicron Scare May Be Overblown, And I’m Expecting A Rally

Last week’s market action was driven by news.

Early in the week, President Biden announced that he was nominating Jerome Powell for a second term as Chair of the Federal Reserve. There is broad bipartisan support for Powell, and Senate confirmation shouldn’t be an issue.

That means traders know exactly what to expect of the Fed in the coming months. While inflation is likely to remain uncomfortably high for consumers, the Fed is unlikely to take emergency actions that will hurt the financial markets.

If that was the only news we saw last week, I would expect that stocks could make a move similar to the one seen after his initial nomination. The arrow in the chart below shows the S&P 500’s response to that news back in late 2017.

But, as you know, that wasn’t the only news we got last week. On Friday, The Wall Street Journal explained, “Markets sold off worldwide on Friday after South Africa raised alarm about the new “variant of concern” that the World Health Organization named Omicron. The panic may be driven more by the fear of new government lockdowns and social distancing than by the variant itself.”

I believe we don’t know enough about the variant to justify a panic. Experts noted that Omicron’s mutations do seem to make it more transmissible and may allow it to evade some of the vaccine’s immune response.

On the other hand, Reuters also noted:

A South African doctor who was one of the first to suspect a different coronavirus strain among patients said on Sunday that symptoms of the Omicron variant were so far mild and could be treated at home.

Dr. Angelique Coetzee, a private practitioner and chair of South African Medical Association, told Reuters that on Nov. 18 she noticed seven patients at her clinic who had symptoms different from the dominant Delta variant, albeit “very mild”.

The doctor explained that her patients complained of severe fatigue for one or two days along with headaches and generalized aches and pain. So far, no patient reported loss of smell or taste, and there has been no major drop in oxygen levels with the new variant.

My Take On The Road Ahead…

The Journal seems to be correct. There is a new variant, but initial indications are that the healthcare systems of developed economies can handle the strain. The fear is that governments may react by closing borders or taking other actions that could exacerbate supply chain shortages.

I don’t mean to downplay the risks of illness. But the market’s reaction — including Friday’s 2.5% decline in the Dow Jones Industrial Average and the 13% one-day drop in oil prices — seems out of line with what we know so far.

I expect news to drive markets for the rest of this week, but I believe a rally is likely.

Turning to my indicators, the short-term outlook for SPDR S&P 500 ETF (NYSE: SPY) is relatively bullish.

My Income Trader Volatility (ITV) indicator remains on a “buy” signal. The indicator (red line) is below its moving average (blue line) in the bottom panel of the chart below. Even though my ITV indicator is headed back up toward its average, we won’t have a signal change until it crosses above the line.

For those who aren’t familiar with ITV, think of it as a volatility indicator (like the VIX), but for individual stocks and ETFs. So lower volatility is generally a good thing. You can look back at other similar times this has happened with the indicator to compare how the market reacted.

My Profit Amplifier Momentum (PAM) is designed as a short-term indicator. It shows that momentum is mildly bearish and remains weak, but it is now oversold and at extremes that preceded rallies in the past.

For the short term, based on my indicators, I am optimistic. December has closed higher 88% of the time in the first year of a presidential administration, and I’ll be watching for that rally to begin this week.

In the meantime, my colleague Dr. Stephen Leeb has released an explosive report detailing what the government, the financial media, and the analysts on Wall Street aren’t telling you about inflation…

He makes the case for why it’s is the single greatest threat to your wealth right now — and that you need to act now to protect your home, your savings, your investments, and your retirement.

In addition to his warnings, Dr. Leeb also reveals six investments that could soar over the next few years as inflation takes root — and they’re not all what you might think… Go here to check out his report now.