Back in the early days of Saturday Night Live (when the show was actually called just, “Saturday Night”…which most people don’t know), the brilliant comedian, Gilda Radnar, did a repeating skit playing the character of Emily Litella. That’s right, before Ms. Radner originated an even more iconic character, Rosanne Roseannadanna, she played Emily Litella…and older woman who was hard of hearing and seemed misunderstand every important issue of the day.
It was part of the “Weekend Update” portion of the show, and she would begin by asking questions like, “What’s this I hear about violins on TV?” (She didn’t understand what was wrong with a musical instrument on television. She would then talk about how listening to violins could be good for everybody.) Chevy Chase would eventually cut-in and say, “No Miss Litella, the issue is VIOLENCE on TV, not violins on TV.” Emily would then so, “Oh…sorry….never mind.” (The best one was when she began by asking, “What’s this I hear about a presidential erection?”…when the real issue was a presidential ELECTION.)
It seems like we need Emily Litella back on TV, but instead of Saturday Night Live, she should go on the business news networks every morning and say, “never mind” when it comes to the consensus narrative about the omicron variant of the coronavirus. On Friday, that narrative said that omicron was something that spread much faster than any other strain of Covid-19…and it was also something that would likely not be contained by the existing vaccines. By Monday morning however, the experts were saying, “Never mind”…and that omicron will not cause any problems at all. However, this morning, the narrative is saying, “Never mind” once again…and now we do indeed need to be worried about it.
We’re not really sure what has really changed. In actuality, nobody knows (or can possibly know) how much of an impact this new variant will have on the global economy. In fact, we’re not sure what has really changed from yesterday either. The concerns that Moderna has about its vaccine are not any different than they were yesterday. Yes, Regeneron IS saying that its Covid antibody might not work well against omicron…and Fed Chairman Powell is saying that this variant does add economic risks…so we don’t want to say that NOTHING has changed. However, it sure doesn’t sound like it’s a lot different than it was Friday morning.
In other words, we believe that the uncertainty surrounding this new variant SHOULD create a of pull-back in the markets. The stock market had become quite overbought after the big rally from early October into mid/late November…and it had become extremely expensive. Therefore, it makes total sense that the market should at least see some sort of pullback given that we now have a new (and important) increased level of uncertainty.
Of course, there are other reasons why this increased level of uncertainty should cause a short-term pullback in the markets is the fact that several key issues have changed since the spring/summer months. First, inflation has gone from “transitory”…to something that is a real problem. Second, forward earnings estimates have gone being increased every quarter during earnings season…to not being increased at all during the Q3 earnings season…..Third, we have gone from a Fed that had the pedal to the metal in terms of stimulus…to one where they are hinting about becoming more aggressive (more quickly) in tapering back their QE program AND raising short-term interest rates.
If the stock market was trading at 15x earnings (like it was when the Fed began pulling in their horns the last time they tapered back on a QE program), we would not be as concerned about this increase in “uncertainty.” However, since the market is SO extended both technically and fundamentally, a repricing of risk makes perfect sense.
This does not mean that the stock market will get clobbered, however, given the fact that issues like momentum based algo trading…and the impact of “gamma”…can (and does) work in both directions, it does mean that any decline in the market could surprise some people in its size. (Let’s face it, these issues helped the market RALLY a lot more than people thought in October…so it makes total sense that they might create an outsized move in the other direction as well.)
If (repeat, IF) the market does indeed fall again due to these new uncertainties, the support levels to watch are well defined. The first support level is the lows from Friday. For the S&P 500 index, that level is 4,585. A break below that level would certainly send up a yellow warning flag on the short-term potential for the stock market…….The next level comes-in at/near the 4,480 level. That is where the 100-DMA and the trend-line from the 2020 election come-in. (The 100-DMA has provided strong support for the S&P 500 over the last 12 months.) A break below that level would raise a yellow warning flag on an intermediate-term basis…….Finally, the October low of 4,300 is the most important level to watch. That would give the S&P 500 it first major “lower-low” since the March 2020 lows. Therefore, THAT level is the “line in sand” for the stock market…and a meaningful break below that level would send up a big red warning flag…because it would confirm an important change in trend for stocks.
That “line in the sand” level is still almost 7% below where the market closed last night, so it’s not something to be overly concerned about yet. However, given how much the momentum based “algos”…and “gamma”…can move the markets in an outsized manner now-a-days, we wanted to make sure we highlighted that level this morning as well.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.