The market is seeing some early bounce action as emotions cool, and market participants are considering positioning for the final month of the year. Worries about the Omicron variant appear to be cooling, but there is still substantial uncertainty, and there is concern about restrictive governmental policies that may have an economic impact. There is little appetite for shutdowns, but travel restrictions appear likely.
The very poor action on Tuesday was more a function of concerns about Fed policy than worries about Covid variants. There was some hope that the economic impact of the variant would cause Jerome Powell to be more cautious about tapering, but he was much more hawkish than was anticipated.
The market has never really embraced the idea that inflation was 'transitory,' so it is positive that the Fed's view now aligns with the market. It isn't all bad that there will be a more concentrated effort to deal with inflation at an early stage. The stimulus impact of Fed policy will be missed, but the more responsible monetary policy will be appreciated.
The market still has work to do in order to sort out both the Fed and the Omicron variant, and that is reflected in the very messy technical action. There is an endless number of stats that show how badly the average stock has been performing versus the indexes. Large parts of the market are deep into bear markets, while the S&P 500 and Nasdaq do not reflect that at all.
On Tuesday, some of the bigger cap names started to catch up to the downside with small-caps, but the disparity in performance is still substantial.
One of the best illustrations of how the indexes are misstating the strength in this market is to look at how hedge funds have been performing versus the S&P 500. The S&P 500 is up about 21.5% year to date. According to Aurum.com, at the end of October, the average year-to-date return for hedge funds was just 7.6%. Finally, November will be out later, but it is unlikely that the wide gulf in performance has closed very much.
With so many money managers underperforming their benchmarks, there will be extreme pressure to create performance in the final month of the year. That will likely increase volatility and intensive rotational action as money managers hunt for alpha.
This is a very tricky market environment, and there is significant headline risk. The good news is that many stocks are being sold without regard to their merits, and therein are many good opportunities.