Market players fight Omicron pessimism

The stock market, crude oil and cryptocurrencies rebound this morning despite reports of the Omicron variant appearing in several new countries. Details on the variant are still mostly unknown, but there is optimism that vaccines will fight it effectively or that new ones can be developed quickly. Some travel restrictions are coming into effect, but many market participants are reluctant to embrace economic pessimism.

So far, there have been no reports of the Omicron variant in the United States, but cases have been reported in Canada, and it is highly likely that it is already there. The big problem for traders will be the market response once some cases are reported in the United States.

As the market digested new variant surprises and Friday’s sell-off, a bearish buying psychology developed. For most of the year, the smart decision has been to buy any sale created by the COVID worries. The biggest economic downside has always been the restrictions imposed by different levels of government, and the market already seems to have ignored these barriers to some extent.

There are a number of questions to consider from a business perspective at the start of the week. The first will be whether there will be another step down as the details on the variant become clear. This morning’s action is creating a declining buyer’s supply. Many of them will look for buying opportunities if there is a new weakness. There are already fears that they may have missed an opportunity, but they will be looking for another wave of panic.

A second problem is the potential for rotational action. While it wasn’t evident on Friday, there was some relative strength in stocks which had been hit hard earlier in the week. The sell-off was more focused on larger cap stocks and broad indexes. Money was pouring into some of the most battered groups, and bargain hunters were active.

A third issue to consider is seasonality and tax loss selling. As I have discussed several times recently, the indices have significantly distorted what the average stock does. There are a significant number of stocks traded near yearlows that could be sold to reap tax losses. Additionally, there are many side stocks that aren’t even about to expand and will offer good entry points that will attract year-end cash flows.

To effectively navigate this market, it is extremely important to understand that indices have rarely distorted the health of the market as much as they do now.

The rebound action that developed overnight holds up well at first, but there are many fears that this new COVID variant could cause economic restrictions. So far, the market is unwilling to embrace negativity.

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