Why Rising Fear Presents A Problem For This Market…

News continued to drive the markets last week. More than news, it was the reaction to the unknown parts of the news that drove widespread selling.

We’re still gaining important details about what exactly the new variant of the coronavirus will do. But policymakers are preparing for the worst. This is different from what we saw in the past.

In the depths of the Great Depression, President Roosevelt offered assurances that things would improve because all we had to fear was fear itself. That is from FDR’s first inaugural speech in 1932. The full quote is worth considering: “So, first of all, let me assert my firm belief that the only thing we have to fear is…fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

FDR was telling his fellow Americans not to listen to rumors and to avoid acting in panic. What we really had to fear related to an economy that was in a steep contraction, was fear that the economy would get worse.

Right now, that sums up the state of the state of the stock market.

Yes, omicron is going to lead to an increase in Covid cases and we need to take precautions. But we are unlikely to see the economy shut down as it did in 2020. Most businesses will be able to operate with adequate precautions, and consumers have largely adapted to the new normal when shopping.

If we won’t see an economic shutdown, the biggest risk to the market is the fear of a shutdown.

The same is true for inflation. Large businesses can adapt to higher prices and maintain profitability. The biggest risk to the market is the fear that inflation will present insurmountable challenges.

Additionally, the economy is also strong, which we saw in last Friday’s unemployment data. The unemployment rate fell to 4.2%, below the Federal Reserve’s estimate of full employment, which is 4.5%. Wages are rising, but inflation is rising faster. The Fed meets next week and should take steps to address this problem.

How I’m Trading Right Now…

Given the strong fundamentals, the only thing we really have to fear is fear itself. Unfortunately, fear is rising. That’s confirmed by both of my indicators.

The chart of SPDR S&P 500 ETF (NYSE: SPY) shows that my Income Trader Volatility (ITV) indicator (red line) crossed above its moving average (blue line) in the chart below.

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 with the indicator rising, this is a “sell” signal. The price pattern offers additional reason for caution. There is no clear support until the price reaches $440, nearly 3% below Friday’s close.

My Profit Amplifier Momentum (PAM) indicator remains weak and oversold, meaning it is at extremes that preceded rallies in the past.

PAM is designed as a short-term indicator. It shows that momentum is deeply bearish.

Putting it all together, I do see a risk that the selling pressure could continue this week. But after that, I am optimistic. As I noted last week, December has closed higher 88% of the time in the first year of a new presidential administration, and I’m still watching for that rally. With that to hopefully look forward to, any additional selling continues to be a buying opportunity.

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.