- A rally during the last week of trading has history on its side
- Investors seemed to accept hawkish Fed and Omicron spread last week, but that could change in the new year
Despite the Fed's hawkish tilt in December and the rapid, ongoing spread of COVID's latest variant, Omicron, possibly the most transmissible strain of the virus thus far, all four major US benchmarks—the S&P 500, Dow Jones, NASDAQ and Russell 2000—rose at the end of holiday-shortened trading on Thursday. As well, each index gained for the week, ahead of Friday's Christmas break, with the S&P 500 notching a new record to boot.
Though markets are anticipating US Federal Reserve moves to continue tightening in 2022, with interest rate hikes up next, investors remain willing to increase risk. That bodes well for the possibility of a belated Santa Rally into the end of 2021 and perhaps beyond.
Calm Before Or After The Storm?
It's surprising that one of the most hawkish Fed moves in years appears to have received so little push-back or fanfare from markets. For years, we've been wondering how the central bank will extricate itself from the deep stimulus hole it's dug itself into. Indeed, before this, any talk of pulling back from easing triggered equity market tantrums. Yet now, when it's finally official, there's been barely a peep from investors.
We think that's awfully strange. It might be the recent moves higher are the result of thin volume with institutional traders already on holiday and just an array of retail investors actively participating. That could be the same scenario during the coming week.
Which makes us wonder: was the recent market turbulence the storm before the quiet, or will the week ahead be the quiet before the storm? We can't know, of course, but in our view there's still another shoe getting ready to drop.
In addition, the news about the latest virus variant seems to be abating. Still, the alarming rate of contagion should be, well, alarming. Even if the percentage of severe cases from Omicron is significantly lower than those from the Delta strain, the much higher infection rate could increase the total number of severe cases anyway.
The new variant could be a leading indicator for another scenario some health officials have warned about—a virus that continues to spin out new variants without ever being fully contained. Notwithstanding, the FDA's approval of oral COVID therapies from Pfizer (NYSE:PFE) and Merck (NYSE:MRK) gives investors hope.
As for the potential for an equity rally in the coming week: between Christmas and the New Year holiday since 1928, the S&P 500 rose almost 79% of the time, gaining an average of roughly of 1.7%.
Furthermore, the broad benchmark is about +25% year-to-date, and Santa Claus rallies tended to be more assertive with momentum as a tailwind. That set up is also identifiable on the SPX technical chart.
The S&P has been developing an H&S continuation pattern. The MACD and RSI signal that the price and momentum are primed for a breakout to record highs.
One notable fundamental theme that could give stocks that push is a breakthrough on US President Joe Biden's $1.75 trillion Build Back Better climate and social spending bill. Stocks plunged when West Virginia Senator Joe Manchin pulled his support at the last minute, leaving the bill short one necessary vote for passage.
Though we often look to Treasuries for clues regarding risk appetite and investor sentiment about the economy, yields have not been sending out clear enough signals from our perspective.
Rates, including for the 10-year note, have just climbed back above the 200 DMA, which has possibly been assuming the role of neckline to a top (H&S, double top?). However, we're not yet ready to call it a failed top, as rates found resistance by what appears to be an emerging symmetrical triangle.
This tends to be a continuation pattern and coming from the top, it increases the odds of a breakout. If that happens, it means investors are moving capital back into safe havens, a negative omen for stocks.
The US dollar tends to correlate positively with rates. The USD is also waiting for resolution amid disruption within the uptrend.
At first, we thought that a shorter-term pennant might turn into an ascending triangle. This would be considered bullish, indicating buyers are willing to up the ante. At the same time, sellers are less enthusiastic, selling only at the same high levels.
Note that bulls are using this pattern as a springboard to increase the momentum of the greenback, sending it into a steeper rising channel.
Gold, like Treasury yields, has been playing tricks on us. Both, after all, are considered safe havens. But conditions have been changing, and so have our views on the precious metal.
It now appears that market forces are gearing up to send the yellow metal higher. Gold may be developing an H&S continuation pattern (or symmetrical triangle, with the same implications). Penetration of the $1,900 level will suggest a challenge to the August 2020 record.
Bitcoin was little changed over the weekend, after rising on Thursday to its highest price since Dec. 3. There's been a lot of talk recently about 'buying the dip.' However, it should be pointed out that while the price of the cryptocurrency is below its November record, the value of the leading digital token has more than doubled in 12 months.
In that sense, its price is now sky-high. Also, Bitcoin's technical chart is alarming.
BTC/USD has been developing a rising wedge since the April peak. This pattern contains the spurned hopes of buyers after they gave it all they had but couldn't sustain the momentum.
The price isn't going any higher. It's now sitting between the April and November peaks. This pattern could also be the setup for a double top, whose neckline is at the $29,000 level. If that happens, we're looking at an implied target of near-$0.
Oil climbed for the third straight day ahead of the weekend, its longest winning streak since Dec. 8 and reached its highest point in a month. Technically, however, we're afraid the rally won't last.
The upmove stopped below the broken uptrend line since Apr. 27 and may have developed an upsloping H&S top.
The Week Ahead
All times listed are EST
Monday
Markets closed for Christmas in Australia, Canada, the UK and other locations.
Tuesday
10:00: US – CB Consumer Confidence: previous reading came in at 109.5.
Wednesday
10:00: US – Pending Home Sales: expected to plummet to 0.6% from 7.5%.
10:30: US – Crude Oil Inventories: last week's print showed a drawdown of -4.715M bbls.
Thursday
8:30: US – Initial Jobless Claims: seen to remain steady at 205K.
20:00: China – Manufacturing PMI: predicted to retreat to 49.6 from 50.1
Friday
New Year's Holiday; markets closed in Brazil, Japan, Singapore, Russia, Germany, Switzerland and the UK among others.