We have been saying recently that we believe the biggest headwind facing the markets right now is the significant change in policy by the Fed. However, there is little question that the larger drop in the futures this morning is due to the increase in the renewed lockdowns around the globe because of the jump in the spread of the omicron variant (and concerns that we could see renewed lock downs in the U.S.).
Yes, some blame is being focused on Senator Manchin’s decision not to vote for President Biden’s Built Back Better program, but it was becoming very obvious by mid-week last week that this was going to be pushed into next year, so this issue is having a much smaller impact than some politically oriented people would like to portray.
To be honest, we think the crisis in Turkey is probably having a bigger impact on the global stock markets than the political situation in DC…as the currency crisis in that country is quickly becoming a financial crisis. (The 12% decline in Turkey’s stock market over the past two days is throwing a wrench in the works for those who try to say that stocks are a great hedge against inflation.)
That said, we still believe that the shrinking “punch bowl” will give the U.S. market the bigger headwinds in 2022, but either way, it looks like this holiday shortened week is going to be another volatile one for the stock market. This morning’s weakness is going to take the S&P 500 Index below its 50-DMA, but as we’ve highlighted several times recently, we don’t see the 50-DMA as a very important support level right now. Therefore, if it breaks that line, it won’t be a big concern for us. The more important level is the early December lows. For the S&P 500, that level is 4,513…and is still more than 1% below where S&P will open this morning (assuming it opens 60 points lower…which is where the futures are trading as we write).
However, the decline in the Nasdaq futures WILL take that index below its closing lows from December 3rd, so this is a concern……Of course, just because the market is going to open a lot lower this morning, it does not mean that it will CLOSE below those December 3rd lows. The market has been seen some big intraday moves recently, so it could bounce back…and avoid any serious technical damage. However, if this early morning weakness does not fade…and especially if it accelerates…things could get quite ugly. Remember, the impact of “gamma” can (and does) work in both directions…as does the impact of momentum based algos…so hold onto your hats if the stock market cannot regain some of its early morning losses rather quickly.
Having said all this, one of the most important developments this week just might come AFTER today’s close. That’s when Micron (MU) reports their earnings. This stock has been stuck in a sideways range over the past month (after a very strong rally from mid-October to late November). The stock has been trading between $80 and $88. Therefore, if their earnings report is good enough to take it above that range…or bad enough to take it below that range…it should be important for the stock.
This could/should be important enough to have an impact on the entire group. As we highlighted in our weekend piece, the SMH semiconductor ETF is testing the bottom end of its own multi-week sideways range, so if it breaks below that line, it’s going to be quite bearish for the group. Given that the chip stocks are an important leadership group, it would not be good for the broad market either……..On the flip side, if MU can help the SMH bounce strongly, it will give the market some much needed relief.
Don’t get us wrong, we’re not trying to say that how good or bad MU’s earnings are when they report tonight will be THE key issue for the broad stock market this week. Developments on the pandemic, Turkey, Washington DC, or some other issue could easily play a much larger role. However, how MU reacts to its earnings report in after-market trading tonight (and once the market opens tomorrow) is something we’ll be keeping a close eye on.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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