There's a Lot More Than Omicron Impacting This Market Now

Clearly Omicron, a new variant of Covid-19, spooked markets Friday, but I think it was more of a catalyst than the real reason behind the market's decline. Omicron, and exceptionally thin liquidity on a holiday-shortened trading day, combined to force stocks and crypto down. But the other issues that played a role in Friday's drama still need to be addressed and are likely to be an overhang in the market for the coming days. Stocks and crypto rebounded during a strong open Monday, but I would fade that rally. I have a list of reasons that I think contributed to Friday's selloff, that still need to be resolved: Lots of mitigating factors on Omicron were already known on Friday. We knew about vaccines, treatments, their ability to evolve and we were even getting data that pointed to Omicron as highly transmissible, but potentially less dangerous. Since the market knew this on Friday, it is logical to conclude that despite the headlines, markets were reacting to more than just Omicron. Overbought Conditions. RSI (relative strength index) has been hovering near levels that piqued the interest of contrarians for the past few weeks. Performance chasing was real as we near the holiday season and many investors were more concerned about missing out on a Santa Rally than they were about being blindsided. Cheap Vol. While VIX had been creeping higher, it was still low compared to where it has been the rest of the year. The gambling nature of these markets has been a topic of conversation for almost a year. Nothing has changed, and it will be interesting to see if Monday brings out the weekly call buyers trying to squeeze stocks higher, or whether they switch to the dark side and start loading up on weekly puts. Strange Patterns. With major stock indexes sitting near highs, it was strange (as we pointed out) how many stocks were sitting at 52-week lows. The stocks that had done well were bid without, and those that had struggled continued to find few buyers. Even on Friday, there were some obvious winners and losers related to Omicron and renewed work from home, but there were many outliers. It also seemed strange, at least to me, why crypto would get hit so hard. Less Dovish Central Bankers. For the first time since the pandemic started, we faced a selloff where it is unclear what the Fed (and other central banks) will do. There is no guarantee of easy money going forward. Yes, if markets fall a lot further (say 5% to 10%) the central banks will likely try to be boost markets by jawboning, but for now, the path seems to be fewer bond purchases and even rate hikes across the globe. That changes the buy the dip functionality (especially if investors were already loaded to the gills on risky assets). Emerging Markets. The Turkish lira is in shambles, even by Turkish lira standards. The Mexican peso caught some of that illness recently, and has spiked to its weakest level in over a year. Emerging market bonds have been hit hard across the board ( , a bond ETF, is down almost 4% in two weeks, while Treasury yields, at the long end, have lowered making that price drop more impressive). If bonds lead the way, the emerging market bond market is sending a nasty warning signal that has shown no signs of abating. And yes, I am a believer that more high-yield bond/leveraged loan selloffs start in the emerging market arena than a logical person would believe. Liquidity and Credit. Credit has had its own little nagging issues. The front end of corporate bonds has been for sale. Program trading, which apparently has left dealers with inventory they are trying to hedge with CDS indexes (which are an awful match for their bond positions), is creating some interesting mismatches. This growing bond inventory is coming right as we hit that time of year where many traders are under pressure to reduce, not increase, their position size. Given the nature of their books (long a lot of shorter-dated bonds, versus hedged and wedged with CDS and ETFs) we could see some whipsaws in these various markets. The high-yield ETFs ( and ), which have marched to the beat of their own drum for the past few months (their tracking error is weird right now), took a decent hit last week. I'm not saying this is like late 2018, when Jerome Powell was normalizing and somehow the market got caught offsides, but it is reminiscent of that. I must admit, I got more bearish the longer I wrote and decided to stop myself here. Bottom Line You can blame Omicron, but I think that was a mere catalyst that just triggered a lot of other things, some of which were already in play ahead of Friday. I wouldn't be surprised to get a bounce as we decide Omicron is manageable, but I would fade that bounce, as it isn't all that is going on here. I'm watching emerging markets (FX and bonds) and Bitcoin as leading indicators of potentially more risky asset unwinds to come. I will be looking to add energy, retail, travel, high yield on weakness (I'm combing through the closed-end funds I like too), while continuing to be cautious of overall risk, especially in the -type of names.

There's a Lot More Than Omicron Impacting This Market Now

There are other reasons that contributed to Friday's selloff that still need to be resolved.

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