Hello traders
I hope you had a good week!
There has been welcome relief for equity investors in the past few days with the S&P 500 index trading 2% higher on the week. This comes on the back of optimism that the Omicron variant might indeed be far less threatening in terms of mortality, even if it appears to be more up to 4 times more transmissible according to a recent study out of Japan.
I wrote about these developments as they unfolded last week. Although it would be premature to dismiss Omicron as a serious issue, the stock market appears to be looking beyond the new restrictions which governments including the UK are once again imposing on their citizens, and is instead focusing on the continued efficacy and modification of vaccines to control the pandemic. Indeed, Bill Ackman’s tweet suggesting that “mild to moderate” symptoms may in fact be a bullish catalyst for the market appears to be catching on; in outcompeting Delta to become the dominant variant, Omicron could potentially mark the end of covid-19 as we have known it up until now (viruses tend to become weaker, over time, with a trade-off between infectiousness and severity).
(I should reiterate that this is only my personal opinion as an investor, and, like Bill, I am not a qualified virologist).
I shared the following Checklist with you last week which is taken from our newly updated monthly report. I had previously obscured some of the numbers so that I didn’t give too much away given that it had only just been released to our Trading Club members. However, I am pleased to review the full score that we became aware of last week just in time for the rally.
A score of +3 clearly made the case for owning stocks at a time when the S&P 500 had seen heavy selling and was trading right above the 4500 level. This proved to be a great setup with long positions capitalising on a 200 point swing higher in a matter of days.
They question now is whether the bond market knows something that the equity market doesn’t, given the lack of confirmation provided by the 5-30 yield spread presented in the following chart presented by Bloomberg. According to their research, we should have expected to see an uptick (steepening) of the line in the lower panel coincident with the equity market gain depicted in the upper panel. As this failed to happen, bears might well question how long the current rally will last. I however believe in our process and would point to the trend in the 5-30 spread which has been declining all year, during which time the stock market has gained over 25%.
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Have a great weekend,
James
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