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Week Ahead: Volatility Could Fuel Wild Swings Between Risk-On And Safer Havens

By Investing.com (Pinchas Cohen/Investing.com)Market OverviewDec 05, 2021 08:25AM ET
www.investing.com/analysis/week-ahead-volatility-could-fuel-wild-swings-between-riskon-and-safer-havens-200610485
Week Ahead: Volatility Could Fuel Wild Swings Between Risk-On And Safer Havens
By Investing.com (Pinchas Cohen/Investing.com)   |  Dec 05, 2021 08:25AM ET
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  • Expectations increase that investors will reposition portfolios to once again reflect Reflation Trade
  • US small cap index now undervalued while NASDAQ 100 looks to have completed a bearish pattern
  • Volatility will continue to drive risk assets

The current market narrative anticipates value stocks will outperform growth shares in upcoming trading after the US Federal Reserve's hawkish U-turn last week signaled that tapering could be accelerated and rate hikes might occur sooner than investors expected. Fed Chair Jerome Powell's comments that the word he once favored on inflation,"'transitory' should be retired from usage," sent additional jitters through risk markets.

Powell had expected inflation to ease once the post-pandemic global supply bottleneck loosened. That may have been a reasonable assumption from an economic theory perspective, but he was wrong given current supply chain logistics. Powell didn't expect inventory shortages to remain this prevalent for this long.

Adding yet additional pressure to risk assets and the overall economy—the emergence of a new COVID strain known as the Omicron variant—which could continue to trigger volatility across equity markets.

In truth, the ongoing fluctuation between growth and value stocks has been in play in one form or another since the March 2020 bottom when the COVID-19 pandemic shut down global economies. In its aftermath the term Reflation Trade was coined to describe the sometimes rapid rotations out of growth and into value investing.

Growth stocks, often tech companies, tend to be riskier investments since the companies issuing those shares generally don't pay dividends. Rather, they reinvest profits into their product lineups in order to stay ahead of the competition. This can sometimes make the price of shares escalate rapidly, meaning these stocks are also usually traded at high multiples.

Value shares are driven by economic health. Sectors such as Financials, Energy, Industrials and Materials tend to outperform when economic growth accelerates. These shares also tend to do better after having been neglected in favor of growth stocks as occurred once pandemic lockdowns were rolled back.

Powell's Senate testimony last Tuesday left investors with the sense that Fed rate hikes could come as early as the first half of 2022. Rising interest rates will benefit banks, whose primary business is loans. Higher rates on loans allow banks to obtain higher markups on the interest they charge borrowers. Of course, investors are well aware of this and increase bank positions in their portfolios accordingly.

Of interest, however: there has been no obvious rotation away from Technology shares into sectors sensitive to the economic cycle. On Friday, even as Financials fell 1.63% on the day, Tech dropped only 0.03% more.

Moreover, on a weekly basis Tech declined by 0.5% while Communication Services—an offshoot of the broader Technology sector—slumped 3.21%, with Financials underperforming at -5.28% for the same period.

However, when looking at the respective legs down of these sectors, there a visible shift. The Technology sector continues to provide the best results among the three sectors, falling 3.61% during back-to-back weeks. However, the second-best performer is Financials which lost 5.28% in a three-week-straight selloff. Communication Services was the underperformer in this timeframe, shedding 8.57% in a four-week losing streak.

Of course, there's another theme overshadowing reflation: Omicron. Since technology stocks were the market darlings during the first coronavirus wave, boosted by stay-at-home restrictions, investors may be trying to hedge their bets by shifting between growth and value, but not actually selling off much of either.

That could help explain why the Russell 2000 has been severely underperforming peers despite listing cyclical shares. The small cap index dropped 2.54% on Friday, significantly worse than the 1.74% decline of the NASDAQ 100. The mega cap Dow Jones retreated 'just' 0.17% while the broader S&P 500 lost 0.84%.

This underperformance by the Russell 2000 continued on a weekly basis too, with the small cap benchmark plunging 3.86% versus the NASDAQ's 1.74% for the week, and even more than the Dow's 0.94% dip and the SPX's 1.22% fall. Finally, the Russell has plummeted four weeks in a row, losing a whopping 11.40% in value.

The only other index to suffer a four-week selloff was the Dow Jones, but the 30-component index lost only 4.82% during that time, less than half that of the Russell.

However, if, per reports thus far, the Omicron variant proves milder than the Delta strain, we might see investors rush back into downtrodden Russell 2000 shares. In addition, the NASDAQ 100 may have just topped out.

NDX Daily
NDX Daily

The tech-heavy index just completed a small H&S top, whose neckline provided a resistance two days in a row. The next point of resistance is the uptrend line since the March 2020 bottom.

Since investors are more fearful of risks surrounding the latest virus mutation, they exited equities altogether on Friday, fleeing into safe havens. This raised the demand for Treasuries, including the 10-year note, pushing the yield on the benchmark below 1.4%.

UST 10Y Daily
UST 10Y Daily

Treasury rates have completed a double top, putting yields on a trajectory to potentially achieve a much larger double top, rendering the current top the right side of the larger formation, in place since February.

Evidence that Omicron has been central to trader sentiment is even more obvious via the US dollar.

Dollar Daily
Dollar Daily

Even the Fed's more hawkish tone failed to significantly boost the dollar, leaving traders to struggle between an H&S top and the support of a rising channel breakout.

Similar ambivalence is visible via gold.

Gold Daily
Gold Daily

The yellow metal barely edged lower after Powell's testimony last week, when one would have expected it to plunge. However, it's struggling to stay above the bottom of its rising channel.

Bitcoin is little changed on Sunday after a three-day selloff took the cryptocurrency back below $50K, for an almost 14% loss at one point.

BTC/USD Weekly
BTC/USD Weekly

On the daily chart, the number one token by market cap found support by the 100 DMA, but only after it completed a down sloping H&S top, one that was too weak to properly develop a right shoulder. On the weekly chart, the price is looking to retest the uptrend line since October 2020, at low $40,000 levels.

Oil dropped for a sixth straight week on fears that Omicron will restrict travel, hurting the already fragile demand for the commodity.

Oil Weekly
Oil Weekly

WTI fell below its uptrend line since the Apr. 27 low, finding support, for now, by a flatter uptrend line since March of this year.

The Week Ahead

All times listed are EST

Monday

4:40: UK – Construction PMI: expected to have fallen to 52.0 from 54.6.

Tuesday

5:00: Germany – ZEW Economic Sentiment: seen to decline to 25.3 from 31.7.

10:00: Canada – Ivey PMI: printed at 59.3 in October.

18:50: Japan – GDP: anticipated to rise to 0.04 from -0.8% QoQ and edge lower to 1.6% from -3.0% YoY.

Wednesday

10:00: US – JOLTs Job Openings: October's release came in at 10.438M.

10:00: Canada – BOC Interest Rate Decision: rate expected to remain 0.25%.

10:30: US – Crude Oil Inventories: previously printed at -0.910M.

Thursday

8:30: US – Initial Jobless Claims: forecast to rise to 228K from 222K.

Friday

2:00: UK – GDP: predicted to vault to 22.2% from 6.6% annually.

2:00: UK – Manufacturing Production: anticipated to hold steady at 0.1%.

8:30: US – Core CPI: set to decrease to 0.5% from 0.6%.

Week Ahead: Volatility Could Fuel Wild Swings Between Risk-On And Safer Havens
 

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Week Ahead: Volatility Could Fuel Wild Swings Between Risk-On And Safer Havens

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Comments (6)
Chris Poulos
Chris Poulos Dec 05, 2021 3:23PM ET
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at this point, unless a disease comes about that kills everybody the markets arent going to care. did the markets react to delta? not at all. the markets tend to reflect the attitudes of the millions of humans who participate in them on a daily basis. and market participants care about one thing ... themselves, and making more money for themselves. this is an interesting inflection point historically .... obviously the dow & nasdaq are grossly over valued but investors are so singularly focused on profit that there is no longer any real world connection. its just a giant ponzi scheme now. it will be interesting to see how it all plays out.
Tania Rajpoot
Tania Rajpoot Dec 05, 2021 11:25AM ET
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Your article is absolutely ri8...thnxx
Tobby Olumba
Tobby Olumba Dec 05, 2021 10:25AM ET
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Thank you very much for that.
Gershom Zvi
Gershom Zvi Dec 05, 2021 9:58AM ET
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Ya the real reason for selloff is an interest rate fear Absolutely! Thx truthful article
Shahzad Hussain Viha
Shahzad Hussain Viha Dec 05, 2021 9:25AM ET
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great perfominsh
Waqar Aslam
Waqar Aslam Dec 05, 2021 9:11AM ET
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Thanx for the info 👍
 
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