(Please enjoy this updated version of my weekly commentary published December 1, 2021 from the POWR Value newsletter).

First Omicron Case in the US = Duh…tell me something I don’t know.

Of course no one wanted this to happen. Yet every investor had zero doubt it would happen. And this is yet further proof that people don’t really control the market in the short run. The computers do.

And in this case a negative headline is read as a reason to sell by countless algo programs which begets increases in sell orders…and the downward momentum triggers even more sell orders.

Tomorrow the computers will “reset it…and forget it.” And that is why we have so much unnecessary volatility.

Net- net the market finally tested the 50 day moving average discussed further down in commentary. The final close at 4,513 nestled between the 50 and 100 day levels.

At this stage I could see an immediate and lasting bounce to reject this move. Or perhaps at this stage we need to press down a bit further towards the 100 day moving average at 4,486.

That process would shake loose a few more weak hands from the market before a healthy bounce ensues (More on the technical levels further below).

Either way I am not selling at this stage as we are closer to the bottom than the top.

The only other interesting notes on the day was a solid 534K jobs added according to ADP Employment report. And that was followed by an impressive 61.1 for ISM Manufacturing which was a notch higher than the previous reading.

The 61.5 for New Orders points to more good times ahead in the manufacturing world.

Beyond that I think it is best to reference my market commentary from yesterday’s Reitmeister Total Return:

Let’s push the Omicron variant aside for a second just to consider the following stock market logic.

The average bear market decline for the S&P is 34%. Thus, if any event happens that increases the odds of recession by 10%, then it would be pretty natural to have a 3-4% decline in stock prices (because that equates to about 10% of a 34% selloff).

And yes, if the odds of recession continue to increase, then stocks would keep going down and down.

Now let’s bring Omicron back into the conversation. We have a new “variant of concern” that most likely will spread far and wide like Delta.

On the bad side it seems that current vaccines may not provide much, if any, protection. On the positive side the symptoms at this stage seem to be very mild.

So at this time it was logical for investors to assume the odds of recession increased by 10% with ensuing 3-4% sell off as we go into “wait and see” mode for what happens next.

I believe the most encouraging news for US stock investors was Joe Biden’s statements yesterday that lockdowns seem unnecessary. Indeed that was the prevailing wisdom during Delta where the economy barely skipped a beat and the stock market kept trucking higher.

That is the hoped for outcome at this time as well. However, we would be foolish to not have our eyes wide open that it could get uglier. As in the virus could keep mutating and become more deadly.

If you tack that on top of current vaccines being of little to no benefit, then yes, it would harm the economy and stock market further leading us into a more defensive posture.

For now, we should “stay calm and carry on” with good likelihood of quick and powerful bounce back to the old highs. However, some stocks will get tossed about like rag dolls with the increase in volatility.

Most certainly true for positions that benefit the most from a covid-free world (like airlines, hotels, restaurants etc). But also true for economically sensitive stocks like energy, materials, cyclicals etc.

Yes, patience is required, because the stocks that drop the most will also bounce the most. And you’d hate to sell just before a dramatic turnaround. However, if some stocks stay on the outs for too long, then best to take a smaller loss now instead of a much larger loss down the road.

Indeed this is one of the trickiest parts in all investing. Knowing when to hold’em and when to fold’em. Truly as much art as science.

Often the answer is not binary; Hold or Sell. It can be somewhere between like sell half…hold the rest.

Plain and simple, we will do the best we can in real time. Not all moves will be perfect, but likely the sum total of changes will be beneficial.

In other market moving news, Jobless Claims fell under 200K for the first time since Covid came on the scene. That is a dramatic sign that pre-Omicron things were heating up in a good way for the economy.

The same could be said for the strong regional manufacturing reports for Dallas Fed at +11.8 (above 0 = expansion). Even better was the 61.8 for Chicago PMI (above 50 = expansion. Above 55 = ha, cha, cha!)

The rest of the week there will be even beefier economic reports in the offing. That includes ADP Employment and ISM Manufacturing on Wednesday followed by Government Employment and ISM Services on Friday.

The bummer is any positives there will be considered “old news” with greater focus on what is in the offing with Omicron.

So the last stone to overturn is on the price action front with the following key technical levels after closing at 4,567 Tuesday evening:

4,537 = 50 day moving average (purple line)

4,486 = 100 day moving average (red line)

4,296 = 200 day moving average (gold line)

My sense is that if we made it down this far, then another test of the 50 day moving average is likely a given. Let’s remember that it has already happened 7 times this year including a breach in September that set the paces for a 10% rally starting in early October.

The 100 day has only been tested once in the same time frame as above. That actually proved to be the key resistance level the market could never truly pierce before heading higher once again.

As for the 200 day moving average we haven’t gotten close all year. Yes, it is always tempting to believe that this could be the time it happens. But with rates this low…and the experience of the Delta variant never really hurting the economy…then I say odds are against that deep of a dip at this time.

Taking it back to previous statements, we are in wait and see mode. Likely we have good reason to expect a hefty technical bounce here off the 50 day and 100 day if needed. And if indeed Omicron goes the way of Delta we could be back pressing all time highs before the ball drops on New Years.

However, I am prepared to stay objective and open minded to whatever comes next. And if that means Omicron begets more shutdowns and economic damage, then yes, we will get more defensive in our portfolios. That means selling the riskiest stocks and perhaps adding an inverse ETF or too into the mix.

(end of Reitmeister Total Return commentary from Tuesday 11/30/21).

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All the Best!

Steve Reitmeister
CEO StockNews.com & Editor of POWR Value trading service

SPY shares were trading at $457.40 per share on Thursday afternoon, up $6.90 (+1.53%). Year-to-date, SPY has gained 23.54%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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