For weeks now, Wall Street has been a mass of vague anxieties searching for the right narrative to give all that fear a face and a name. Nothing stuck until today.
Taxes. Inflation. Supply chain disruption. Profit margin compression. Slowing earnings growth. Oil shock. Interest rates. Question marks around the Fed. The bulls climbed every wall of worry.
Right now, that wall has a name: omicron. The new COVID variant is apparently bad enough to once again close international borders and raise travel restrictions, giving Wall Street the worst day of the year in the process.
But I think this is more about a combination of exhaustion and distraction than a real pandemic pain point. And investors who get lured to the sidelines risk missing out on the market’s next burst of optimism.
Don’t believe me? The signals were flashing “caution” before omicron even had a name.
Looking For The Fear Factor
This is what we do around here, week after week. If you’re new, welcome aboard. My goal is to share the insight I’ve accumulated in decades on Wall Street, in hedge fund world and running billions of dollars for one of the richest families in the world.
It’s not entirely altruistic. The more informed investors there are, the more rational the market as a whole will behave.
I’m not a fan of those periods when “markets remain irrational.” While my career has taught me discipline and patience, it’s rarely fun when an overflow of fear depresses great stocks for weeks or even months before the pendulum swings back to reason.
That’s why I watch the fear factors, no matter how exaggerated or overblown they seem. Fear is real even if the reasons investors point at for being afraid are more fiction than fact.
Nervous investors will sell at the slightest provocation. I’ve been watching for this kind of trigger to scare the market. I just didn’t know it would come from a new COVID threat.
I was just on Reuters talking about how tired the market looked. You can watch the video HERE.
In hindsight, it looks prophetic. A break for Thanksgiving was almost inevitable.
The S&P 500 surged from technically oversold to overbought in October and then spent the last three weeks struggling to push farther into record territory.
The Nasdaq effectively capitulated last week. It’s been downhill ever since for key tech stocks like Apple, Alphabet and Amazon.
For weeks, nervous investors blamed interest rates, but it felt more than a little hollow to dump Big Tech when long-term Treasury yields edged above 1.5% and then buy them again a few days later.
The rate ceiling keeps rising, a month at a time. It’s a natural process as the Fed steps away from extreme market support and prepares for a non-zero-rate world for the first time in the post-COVID era.
But while rates are losing their power to scare investors, investors remain skittish. Today’s announcement that the new omicron COVID variant is worth global concern was evidently a good enough excuse to dump a lot of stocks and rotate into last year’s lockdown favorites.
I don’t buy it. Pandemic names like Zoom, Peleton and Chewy were already oversold. They were due a bounce and when it came, the market leapt to the conclusion that the lockdown stocks were back in play.
Learning From Every Variant
And the vaccine stocks went ballistic, again from oversold conditions. But here’s the tell: Pfizer and Moderna started rallying weeks ago. They were already hot stuff on Wall Street, and a fresh wave of vaccine fears only brought more money to their table.
After all, Pfizer says they can reduce COVID hospitalizations 90% with a new drug while retooling their vaccines to target omicron in about 90 days. If you believe that, there’s little reason to suspect that a new outbreak will be anywhere near as bad as what we’ve already endured.
No universal lockdowns. No travel bans. And ultimately, a very limited window for Zoom and Peleton to reap the windfall of people trapped at home.
In other words, for Pfizer to soar, you have to follow the logic through. At worst, this will be over in February. It’s not the end of the world, in other words.
Every variant, the vaccines get better. The development cycle gets faster. While we’re nowhere near perfect yet, we’ve already come a long way in the past 18 months.
And the real big money didn’t even blink. If omicron really looked dire enough to shock the global economy, we’d expect the bond market to start pricing in a pause in the Fed’s future tightening cycle.
That didn’t really happen. Yes, long-term rates dropped to give the Fed another couple of months to step away from that end of the bond market . . . but short-term rates didn’t budge.
There’s no sense out there that Jay Powell will even blink at the new COVID threat. In my experience, the bond market is always right. The weight of cash there simply exerts its own gravity.
So Where Are We?
COVID is still no joke. Be safe out there. But if you’re afraid that the new variant will have the devastating impact of the original virus, the odds are extremely low.
We innovated our way out of the lockdowns. I doubt we’ll repeat the experience. Current vaccines mostly work. They’re getting better and better.
Therapies for people who catch the virus anyway are coming up fast. This is why I love biotech investing: conditions that were once a death sentence become less serious as medical science advances.
Omicron will vanish from Wall Street’s vocabulary in months, weeks or even days. Today’s shock didn’t really shake the benchmarks from rally territory . . . it will take more sustained pressure for that to happen.
Maybe the benchmarks drop another 5% or even 10% before the bulls climb the wall of worry.
But even in that worst likely scenario, vaccinations and therapies are coming. Then we get back to work. Great companies keep making money either way.
You just have to be in the right companies and get in at the right times. And in the meantime, when sentiment is swinging wildly and rational investors like us have to let the fear play itself out, we can always make money trading short-term options.
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If you’re convinced buy-and-hold strategies are dead money while the pandemic is in control, there’s no thrill waiting for you in cash or bonds. Remember, inflation is alive and well.
Money on the sidelines might earn a lowly 1% or 2% a year at the most. Inflation has made everything 6% more expensive over the past 12 months.
But if stocks can’t keep up, options trades like these can do it. Try it out. Or take your chances and try your patience in the buy-and-hold world.
Cannabis Corner: Rotating To The New Kids
Are cannabis stocks really lockdown losers? I have to say the signals from the “green gold rush” put another stake in the heart of the pandemic narrative today.
Aurora gained a little ground in the carnage but big cultivator rivals Tilray and Canopy dropped hard. They usually trade in close correlation and in that past few years the long trend for all three has pointed down.
Instead, I urge you to look to technical factors as the biggest engine behind these stocks’ shifting gears. Tilray and Canopy got a little overbought a few weeks ago and have been deflating ever since.
Aurora fell earlier and harder. If it’s rebounding now, it’s a good sign that the other giants will join it on the bounce. In that case, this is a dip to buy.
But I would rather focus on two of the newer kids in the green world, OrganiGram and Green Thumb Industries. Both actually gained ground this week.
And both were oversold three weeks ago. The shorts are having to scramble to cover. Let the giants drift. This is where the heat is.
GreenTech Opportunities: A Fake Oil Crash
If you’ve been listening to my new weekly radio segments with Kevin McCullough, you know we love electric vehicles . . . but we’re a little skeptical about traction for Tesla and company unless gas prices stay high for extended periods.
Today made me think we’ll see those gas prices stay around the pain point long enough to keep alternative transportation compelling to consumers desperate for relief. To put it mildly, an 11% drop in oil is exaggerated.
When oil prices plunged last year, it was because OPEC and Russia couldn’t agree on supply cuts. The timing around the pandemic was coincidental.
This year, there’s no dithering on oil production. And so I think demand might take a little hit over the next few months . . . but not to the extent we saw in the market today.
Oil is now oversold. A bounce is coming. That’s good for Tesla. It’s especially good for my new favorite stock in the space, Rivian. Mark my words.