O, My

When the facts change, you change your view. Unfortunately for the bearish investor, despite the uncertainties created by the latest variant, the facts don't change with Omicron. But it is providing a buying opportunity for certain risk assets. Despite all the hand-wringing, the reasons are exactly the same as they were for the Delta variant dip. The lift-off for rate hikes is being pushed off yet again.

The bull market lives or dies on the shape of the yield curve that is generated by Fed policy change. The market had been weakening into year-end on fears of an acceleration of the hiking schedule due to inflationary pressure. That threat is potentially off the table now, with a 'perpetual pandemic' as the new narrative. Therefore - people are yet again forced to buy the dip.

Unfortunately, there is less and less worth buying. Yesterday's bounce was dominated by the mega-cap growth names that have dominated markets since the second quarter value trade fizzled out. Reopening plays were universally weak. Emerging markets, Small Caps, and Financials all underperformed the bounce. When it comes to the laggards of this market, if it was a fight, they'd stop it. They should also lag the next bounce.

Over the next few weeks, investors will assimilate the medical data and evaluate the studies in an effort to determine the threats to the economy from Omicron. At some point, the threats from rising rates will re-emerge, as the inflation/tightening narrative returns to the front burner. It should be pushed aside temporarily by the new variant. The Fed meeting in two weeks will be critical to the next market move. If they follow through on their recent threat to introduce an accelerated taper, the market may have to absorb sobering negative effects of a Fed that is suddenly 'ahead of the curve'. Expect a 10 -15% correction if that is the case.

More likely, they may assess the risks from a renewed surge in Covid cases enough of a reason to delay the bad medicine as the economic outlook weakens. Although we heard reassurances from the White House yesterday that shut-down policies have been permanently retired, but the re-opening momentum has likely already peaked. Unfortunately, Europe and China missed the memo on shutdowns. The travel bans and zero-case mindset exhibited there are still being used as policy tools. Biden risks a much greater back-lash from growth restricting shut-downs than von der Layen or Xi. Global growth, ex-US, is likely downshifting yet again. That's the message from Copper/Gold and the flattening yield curve.

In the latter case, a Fed backtrack from tightening risks creating a year-end melt-up of popular growth stocks. Santa rally, I'm calling you! There is a ton of unrisked cash on the sidelines and a whip-saw of investor sentiment could feed on itself faster than a mutated virus. Pushing out the inevitable rate hikes is bullish. Bonds are very expensive, force-feeding equity risk appetite. Over the next few years, you will either lose money slowly (inflation) or quickly (rate hikes) in fixed income. There still is no alternative.

Remember bears, Tina is still wearing her stilettos.

O, my.

Risk Model: 2/5 - Risk Off

Last week's positive reading was another head fake as AAII sentiment data dropped dramatically even before the Omicron news. I expect it to drop even further this week. I wasn't a buyer last week anyway as I saw tired a narrow market advance as risky. My UVXY call was prescient, but I've already sold it. Conversely, the 90% down day and huge volatility spike witnessed argues for a contrarian buy-the-dip stance this week. AAII ratio is now more like a contrarian on/off switch (chart below). Buy the lows here. Tuesday at 11 yet again!

Going against the Model isn't a comfortable place to be but the quickly receding Vix and a 10YR holding the bottom of the range argue that we are seeing a survivable risk-off episode. With the longer-term fundamentals of a growing economy and a supportive risk premium to equities, the market is resisting a full-blown correction from the stubbornly persistent pandemic. The bull market, albeit a touch creaky, is still intact. Leadership is all that we have to get right. For now, Growth>Value with the potential for a much-needed rotation to value sometime next year.

Contrary to the Model - I say risk on!