"No one is so brave that he is not disturbed by something unexpected."
-- Julius Caesar
The news last Thursday was indeed unnerving. A new variant of Covid-19 with so many mutations on the spike protein as to potentially render current vaccines and antibody-based therapeutics ineffective. The news that came six days later was indeed expected, but apparently truly dreaded.
One symptomatic, fully vaccinated, but unboosted individual who had recently traveled to South Africa had tested positive for this new variant in California. The new variant was here, in this country.
Though common sense had told all of us that it had to be, the fact that it was, made headlines, and keyword-reading algorithms triggered action at the point of sale. Equities had been trading broadly higher, in an attempt to rebound from Tuesday's ugly results.
Now, there was panic.
Treasury markets resumed with the task of pricing in the likelihood of reduced economic activity at the long end of the curve, while also trying to price in an earlier exit in central bank participation at the short end. The S&P 500, our largest and broadest measure of large-cap equity performance, closed -1.2% after being as much as 1.9% higher during the session. The daily range for the Dow Jones Industrial Average ended the regular session at 998 points, the range for the Nasdaq Composite? A mere 573 points.
The small-cap Russell 2000 tacked a 2.34% Wednesday loss on top of a 1.92% loss Tuesday (that itself followed a loss of 0.18% following a loss of 3.67%). In fact, last night, the Russell 2000 closed 7.8% below its intraday high from last Friday's half-day session, and down 12.69% form the highs of Nov. 8 for that index.
The selling only accelerated into the close, and on very heavy volume at that. In fact, Wednesday culminated two days of very heavily traded risk-off days. This Tuesday and Wednesday were the two most heavily traded regular session days for constituent members of the S&P 500 in aggregate since mid-September, and for the Nasdaq Composite since late October.
Interestingly, as the yield-curve flattened, and as both Fed Chair Jerome Powell, as well as Moderna ( MRNA) CEO Stephane Bancel served up their honest assessments of the situations at hand, the fear spread.
As the CBOE Total Put/Call Ratio spiked to levels not seen in more than six weeks...
... the VIX spiked to levels not seen since early February.
Money was clearly frightened. Not criticizing. Stating fact. Whether panicked sales over these past few days, especially those made late on Wednesday, prove to be either the "fast" or "smart" money remains to be seen. Maybe both. Maybe neither. No denying, though, that this was "scared" money. The pressure has been broad and professional for days now.
Bloomberg News reports that, according to data compiled by Goldman Sachs, "net leverage," an assessment of industry risk appetite that measures net long versus short positions, had fallen to a one-year low this week, while separate data put together by Bank of America showed something similar. That bank's hedge fund clients sold more than $2B worth of equity just last week (3.5 sessions) alone.
Back to Wednesday, specifically. Losers beat winners at the NYSE by roughly five to two, and at the Nasdaq by almost three to one. Advancing volume comprised 17.7% of the NYSE composite, and 30.7% of the Nasdaq composite for the day. Ten of the 11 S&P sector select SPDR ETFs closed in the red for the day, with defensive-type sectors taking the top three spots as only the Utilities ( XLU) finished the session in the green.
One interesting takeaway, I thought, was that while the Technology SPDR ETF ( XLK) gave up 1.4%, and within that group, the Dow Jones U.S. Semiconductor Index surrendered 1.7% (The Dow Jones U.S. Software Index finished -2.3%), the semiconductor equipment and services stocks did quite well, especially relative to the rest of the group. Applied Materials ( AMAT) , Lam Research ( LRCX) , Entegris ( ENTG) , ASML Holding ( ASML) , and KLA Corp. ( KLAC) all scored gains of between 1% and 3% for Wednesday, truly an outlier sub-industry group.
Just For The Record
Not that anyone should stick their collective heads in the sand, nor forego taking common-sense precautions, but both Oxford University and Ugur Sahin, CEO of BioNTech ( BNTX) , have separately stated their opinions in recent days that currently available vaccines would continue to offer increased protection against severe disease. All is not lost, and this is just opinion (my opinion) here, but even if we hear news that we do not want to hear this week or next, we are far from being knocked back to "square one." We adapt. We overcome. It's what we do.
Investors must stay mentally prepared for swift algorithmic reaction to any and all Omicron news, or Fed speak. This is a time of exponentially expressed market reaction to headline risk. Probably not the best time for the Fed to prioritize the fight against consumer-level inflation over focusing upon labor-market performance, at least until more is known about how deeply this variant will impact economic activity.
I hesitate to sharply criticize the Fed's shift in focus at this time, because if we are to be honest, even if we see the pace of this inflation ebbing naturally within six to eight months, as I do, one can not deny that this Fed, under the leadership of this Chair, has been absolutely magnificent in the execution of their mission (and beyond) since the start of this pandemic. I think that Powell, who in my opinion has been the boldest and most effective Chair since the late, great Paul Volcker, has earned a little bit of trust.
I do not put anyone in the same sentence as Volcker lightly. Very few people I have ever met could command a room like Volcker could. When you spoke with Volcker, you basically shut your pie hole and listened far more than you spoke.
On That Note...
.... Cleveland Fed Pres. Loretta Mester (a Sarge fave), a 2022 voting member of the FOMC, and thought of in economic circles as a "hawk," spoke on Wednesday evening. She said, "Making the taper faster is definitely buying insurance and optionality so that if inflation doesn't move back down significantly next year, we're in a position to be able to hike if we have to."
Futures markets trading in Chicago went out last night pricing in three 25-basis-point increases being made to the target for the Fed Funds Rate in 2022 -- in June, in September, and in December. Keep your helmets on, and buckle your chin straps. Why? Because you don't know. You can't know just yet. I think, just for the time being, it's probably better to be more of a trader and less of an investor, at least for the time being.
Oh, about wearing those helmets (I hate when you kids walk around thinking you're John Wayne), expect President Biden to speak on Thursday, and announce new measures intended to slow the pace of infection within U.S. borders. You are also going to hear more from Treasury Secretary Yellen as federal coffers run low, and several regional district Fed heads as well.
Just as a heads up, joining Mester on the FOMC in 2022 will be Kansas City (George-hawkish), Boston (Montgomery-interim ??), and St. Louis (Bullard- unpredictable, yet pragmatic). Out go Atlanta, Richmond, San Francisco, and Chicago.. at least three doves.
Trading Notes (After Hours)
1. I did add to Zscaler ( ZS) and CrowdStrike ( CRWD) after hours as Wednesday morning's victories quickly turned into something very ugly late in the day.
2. I did puke the entire position in Salesforce ( CRM) at my panic point ($265), though I said I would piece it out (scared money?) I had written to you that I would re-enter at $260. I have not yet pulled that trigger, but still intend to.
3. I also added to my Palentir ( PLTR) long amid the late carnage.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 248K, Last 199K.
08:30 - Continuing Claims (Weekly): Last 2.049M.
10:30 - Natural Gas Inventories (Weekly): Last -21B cf.
The Fed & The Treasury (All Times Eastern)
08:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
09:00 - Speaker: Treasury Secretary Janet Yellen.
11:00 - Speaker: Reserve Board Gov. Randal Quarles.
11:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
11:30 - Speaker: Richmond Fed Pres. Tom Barkin.
11:30 - Speaker: San Francisco Fed Pres. Mary Daly.