The equities market, crude oil, and cryptocurrencies are rebounding this morning despite reports of the Omicron variant appearing in several new countries. Details about the variant are still mostly unknown, but there is optimism that vaccines will effectively combat it or that new ones can be developed quickly. Some travel restrictions are going into effect, but many market participants are reluctant to embrace economic pessimism.
So far, there have not been any reports of the Omicron variant in the U.S., but cases have been reported in Canada, and it is highly likely that it is already here. The big issue for traders will be the market response once there are some cases reported in the U.S.
As the market digested the surprise variant news and the sharp selloff on Friday, a 'buy the dip' psychology developed. For most of the year, the smart move has been to buy any selloff created by COVID worries. The biggest economic negative has consistently been the restrictions imposed by various levels of government, and the market seems to have already discounted those obstacles to some degree.
There are a number of issues to consider from a trading standpoint as we start the week. The first will be whether there will be another leg down as details about the variant become clear. The action this morning is creating a supply of dip buyers. Many of them will be looking for opportunities to buy on further weakness. There already is some concern that they have missed a chance, but they will be looking for another round of panic.
A second issue is the potential for rotational action. Although it was not readily apparent on Friday, there was some relative strength in the stocks that had been hit hard early in the week. The selloff was more concentrated in bigger cap names and indexes that were the most extended. Money was flowing into some of the most battered groups, and bargain hunters were active.
A third issue to consider is seasonality and tax-loss selling. As I've discussed numerous times recently, the indices have greatly misrepresented what the average stock is doing. There is a significant number of stocks trading near the lows of the year that might be sold to harvest tax losses. In addition, many secondary stocks are not even close to being extended and will offer some good entry points that will attract end-of-the-year money flow.
To navigate this market effectively, it is extremely important to understand that the indexes have seldom misrepresented market health as much as they do now.
The bounce action that developed overnight is holding up well in the early going, but there is much concern that this new COVID variant will prompt economic restrictions. So far, the market is not willing to embrace the negativity.
