Daily Brief - Powell + Omicron = Selloff

Have you seen the rrrrrrrrb meme?

Fed chair Jay Powell signalled this week that he would support accelerating monetary tightening to combat inflation - in spite of the new Covid variant.

One day prior the boss of Moderna mentioned that current vaccines might not be as effective towards the new variant.

Then news emerged of the first reported case of Omicron in the US, to complete the apocalyptic scenario.

Markets did not like that. And here we are.

S&P 500 is down 4%, crude oil sold off, and the 2y Treasury Yield rate rose 0.07% to 0.55% (it seems small but actually it’s a lot in a day for a 2y govvie).

Looking at the last 3y, this looks looks like one of the top 10 worst weeks (click here to open in TOGGLE):

So we’re all asking ourselves the same question:

Should I buy the dip?

Firstly, it would be nice to see a cleanup of speculative positions in the market.

The chart below shows that specs in S&P 500 are back to the highs - “20” in the chart below means that there are 20% more long speculative positions than short ones in SPX futures.

When there are so many spec longs and the market retraces, they hit their stops and keep selling until they’re all out of the market.

If these positions retrace to a neutral reading it will be easier to buy the dip (click the chart to open in TOGGLE).

Secondly, we go back to the refrain we mention in every other Daily Brief: forget Omicron, markets have rebounded from worse lockdowns. It's all about inflation and the Fed.

In the past we mentioned that empirical evidence shows inflation spikes 12-18 months after a strong rebound in growth. So there are chances that inflation moderates in the next quarter or so, easing fears of aggressive Fed hiking.

In conclusion, if you do buy the dip, keeping an eye on speculative positions and Fed talk won’t hurt.