Same old: Inflation, FED tapering and Omicron

Good morning!

We had an expected day yesterday, with investors fretting over the FED talk today. The Nasdaq and the S&P500 were hit but did not sell off into the close. I am very light going into today, since it is a binary event and it can trigger the market direction either way. The fear is quite high that the FED will increase the pace of tapering, meaning less injection of capital into the market. However, with Omicron spreading so fast, and restrictions being brought back on the table, there may not be a doubling down on tapering, as it is expected. You can prepare as a hedge some call options for the banking sector, respectively the $XLF. If the FED is not so aggressive as expected we may see a comeback in $QQQ or the $SPY, and this could trigger the long-awaited Santa rally. If this then that. The volatility index did not go close to Black Friday’s levels, and therefore we may not have such sharp moves today. Most of the things are priced in, but the continuous chatter in the media about inflation, deflation and unemployment, combined with Omicron creates a confusion and fear which translates into investors’ sell off.

$SPY Chart

After Monday’s consistent red bar in the $SPY yesterday was to be expected. It held the previous low of $458.65 and the 50 day EMA, which may show relative strength in the market. The close $3 above the lows also shows the power of the markets to rally in the face adversity. If Powell does not double down on tapering we may see a relief and a bounce into the 8 day EMA at $464.96. However, if the news is not so good we may see another low under the 50 day EMA at $458.56. Stay out of the way until we have price discovery, as we can have a good buying opportunity, instead of suffering a huge loss by trying to predict the course of a binary event.

$QQQ Chart

The tech sector is 5% off the highs, therefore the whole chatter around a looming bear market is a bit exaggerated. Tech has seen an impressive increase from March 2020, and it has been the biggest winner. Tech is the future, and the Metaverse is one of them. We need technology to advance in all sectors of society and therefore a small dip it is not to be feared, it is just a natural and healthy for the market. Unfortunately the $QQQ filled the last gap at $387.6, and it hit the 50 day EMA. However, the $QQQ closed above this level. Here we are in uncharted territory as everyone is awaiting for Powell’s tone and course of action. I am out of the way in the tech sector level also, with just some small call options in the strongest tech companies, for the end of the year. My losses are calculated and limited, and like this I am kept slightly involved in the case the news is better than expected.

Inflation and Omicron are the most used words in the media these days, and usually when chatter is so intense the market has already absorbed these things and it has priced in the moves. If Powell seems more hawkish we may see a further drop, but if he keeps an expected pace of bond buying we may see the awaited Santa rally. Do not jump to buy anything big ahead of 2pm ET today, just go for surgical scalps for some cash flow and keep yourselves elastic in front of this binary event. Cash is a position as I have mentioned before. Don’t get beat up that you have lost some money in the last 2 days, everyone has by trying different moves. The important part is to see where you have been wrong and improve your edge. Don’t lose confidence and don’t start hating the market, because it is just a game of probabilities, you are in full control of your actions and each day brings new opportunities.

Read our Morning Game Plan for a more in-depth analysis done by Alex if you would like to have more insight into our portfolio. For updates follow our Twitter.

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