Market update – The “impending crash” (Dec 21st 2021)

Been mulling over whether an update is even warranted given the general softness of the market. Ultimately I’ve decided that if there is anything important I have to share, it’s the importance of persistence.

It has been persistence in the face of adversity, persistence in the face of challenges, persistence in the face of boredom that has ultimately brought me here. And in sharing my ongoing journey from zero to billion, I’d be remiss in not getting that point across.

A new variant?!

About 3 weeks back, news of the Omicron variant in South Africa started sending the media here into cycles of hysteria. Just prior to this, my thesis for the market going into this was cautiously bullish going into that, and was as follows: A portion of the main stocks I was monitoring or had a position in (including $RBLX) had become very extended from their moving averages[1]this is not a concern in and of itself, but when many stocks have a very steep angle of ascent/descent and I notice other factors occurring, I take caution and look to trim. Additionally, fresh breakouts were few and far in between, showing a lack of follow-through. S&P500 looked like it was on track to close its 3rd week under its recent high, and so I marked it out as a level of interest, expecting it to act as a key pivot point.

Typically I like to see a swift up move on the broader indices coinciding with lackluster follow-through and stock participation (among a couple of other factors) for me to trim positions and start taking on some short exposure to cushion and profit a bit on the downside/pullback. With that in mind, I expected to see us temporarily make new all-time highs for a day or two then swiftly fail back below and close the 4th weekly candle back below resistance. Sure enough, it did that, but in a much much shorter span than I had anticipated — after making new highs, within 2 hours it had given it back. I make a point not to trade according to my thesis, and as it didn’t meet the expectation I had in my mind’s eye, I did not take on short hedges.

Luckily I had locked in profits on my bigger runners in early November. However, unluckily, by the next week, news of Omicron conveniently surfaced and caused panic in the markets. In the 3 weeks since, we’ve seen a lot of old darlings of the market get slaughtered, with some names down 50~70%, luckily none in my portfolio. Even $RBLX took quite a tumble, but well within my expectations.

Crash? Cash?

Along with Omicron news, the stock market was heavy in negativity going into Jerome Powell’s speech on Dec 15th. Leading up to it, we had tremendous weakness, with media outlets and the Twittersphere going crazy with bearish outlooks and remarks. Truth be told, I’ve never seen a crash happen when “everyone” as a collective is expecting one and positioned accordingly. In such instances, I’ve done fairly well for myself going against the wisdom of the crowd, but timing is key. Going against the herd can be a recipe to end up trampled. In this instance, given the choppiness and uncertainty of the market along with the lack of setups, I didn’t take any additional positions. Federal Reserve Chair Jerome Powell indicated to expect 3 rate hikes of 0.25% into 2022 and the conclusion of Fed bond buying. This was well in line with my expectations and definitely not anywhere near the worst that could happen. Seemingly caught off guard by this, S&P500 rallied quite hard, but this quickly disappeared in the following days.

Through the past few Fed meetings, it’s been abundantly clear (and communicated many times) that the approach is to communicate any Fed actions as early as possible and then take action so as not to shock the market. Seems many have simply ignored this messaging, but I digress. I don’t expect the market to cope well any other way given how quickly it goes into chop mode.

I am no epidemiologist but so far research on early data from Omicron and the various South African studies have shown that it has a higher spread than the other variants, particularly Delta. When this news first broke my initial impression was that this could be better news than anticipated, given that more transmissible viruses tend to have a lower mortality rate as time in host is a necessary requirement to assist in transmission, and killing or putting the host in critical care too soon greatly diminishes that.

That said, broader transmission could still mean more bodies in our healthcare facilities and cause increased strain on our healthcare systems, though I fully expect countries to be better equipped to deal with this than early on in the pandemic. Only time will tell how significant Omicron is and its impact on the global economy, but so far research results have been more promising than you’d think from the online and media chatter.

Going forward

I tend to be of the opinion this fear is overblown and if we can get the broader market firming up from here, with a lot of stocks failing to fail lower in the immediate term, many will find themselves underexposed and buy to increase exposure. I see no reason on the chart to get overly bearish. Hopes and dreams don’t pay, but the market does, and whatever the market communicates in the following weeks, it’s important to keep a keen eye open and position accordingly.

Signs to watch out for: lack of new lows being created in most weak stocks, higher highs and breakouts happening on stronger players, with breakouts holding better, broader participation in general. Any stocks emerging first out of this carnage will likely be the main leaders if the market gives a next up leg, and worth focusing on.

Cautiously bullish, but not adding any new exposure yet.

References[+]