Here's why the omicron variant doesn't matter to the stock market; Off to Ecuador today

1) U.S. stock markets had their third rocky day out of four yesterday as investors try to figure out the impact of the new omicron variant.

With that in mind, I wanted to share a fascinating analysis my colleague Enrique Abeyta sent out yesterday to his Empire Elite Trader subscribers (click here to sign up for a free trial):

If you're actively invested in the stock market right now, last week's Thanksgiving break probably wasn't as relaxing as you hoped...

For those of you who missed it, after reaching new highs on Monday, November 22, the stock market had one of its worst days in months on Friday. While the S&P 500 Index was only down 2.3%, that was the worst single day since late February.

We also saw a massive spike in volatility. The main volatility index – the VIX – soared 54% on the day. Incredibly, this ranks as the fourth-largest spike in the VIX in the last 20 years...

Date	Daily Performance
2/5/18	116%
2/27/07	64%
1/27/21	62%
11/26/21	54%

While the market had been hitting new highs in recent weeks, a number of growth stocks have pulled back, so we were already seeing a "stealth" correction take place.

The "catalyst" for the sell-off on Friday was the announcement that a new variant of COVID-19 had been discovered by scientists in South Africa. Little was known about this new variant other than it has significantly more genetic mutations than previous variants.

Ostensibly, this news, along with the potential for more COVID-inspired economic and market disruption, led to the sharp sell-off in stocks.

But is this what really happened?

The market rarely sells off on news events. The vast majority of the time, large movements in the stock market are due more to the positioning of investors.

In the case of the past few weeks, we had seen a relentless march upward in the stock market, along with plummeting volatility.

The S&P 500 was up 6% in the month of October, and into the high on November 18, it was up another 2%.

With this type of stock market performance and going into year-end, fear of missing out ("FOMO") begins to play a big role in the minds of money managers.

While most of them are doing well this year, a large rally at the end of the year creates a significant risk of underperformance for them. As a result, many of them were piling on risk.

In looking at some market data, I saw some extreme speculation happening amongst retail investors – the infamous "Texas hedge," where you are long the stock and short the puts... essentially doubling down on bullish bets on the market.

This increase in speculation and risk was happening right as we went into one of the quieter periods of the year: Thanksgiving.

Many professional investors took much of the week off and wanted to put their portfolios on the backburner.
        
These periods are often set up for high volatility.

In fact, I can personally attest to the fact that for many years, the Yom Kippur holiday – where religious Jews are prohibited from doing any work – has often experienced terrible sell-offs.

Lower trading volume, a lack of investor attention, and a dose of volatility can create panic.

That brings us back to the emerging omicron variant...

Without devolving into too much speculation in epidemiology – a popular pursuit in recent years – I think it's unlikely that this is worth panicking over.

Already, initial reports are coming out that the actual symptoms of the new variant may be milder. Additionally, the medical treatment for COVID-19 has been robust as the vaccines have successfully dealt with every variant so far. Plus, treatments for vaccinated people who get COVID-19 have improved immensely.

This is not to dismiss the tragic effect that COVID-19 has had on the world – but the reality is that morbidity from COVID-19 in the developed world has plummeted.

The truth is that the recent sell-off was more due to year-end performance, low volume, and skittish investors.

So, where does that leave us now?

Interestingly enough, massive one-day spikes in the VIX actually produce a spectacular setup for stock market returns.

The last major spike like the one we saw last week was back in June 2020. Here's what has happened to stocks following similar spikes in volatility dating back to 1990...

As you can see, the market is almost always up, with an incredible 94% hit rate. The returns a year later are impressive too, up 18% on average.

This seems counterintuitive... Shouldn't these kinds of massive spikes happen in the context of bear markets?

Not really. Such a dramatic move in the VIX is more of an indication that investors are leaning in the wrong direction, and this usually happens in a bull market.

Imagine it's like the first time you walk into a haunted house... Because you just walked in, you jump much higher when someone jumps out at you. In a bear market, though, you've already been in the haunted house for 30 minutes and it's harder to scare you.

I remain bullish on stocks for a variety of reasons: Economic growth is good, interest rates are low, we're seeing great gains in productivity and technology, and in the very short term, seasonality is still the investor's friend.

In short, I recommend buying the dip.

2) While we remain bullish, at least through the end of the year, I'd avoid airline stocks, as omicron fears may impact this industry hard.

It's already happening on my flight from LaGuardia to Atlanta if this morning is any indication. While every flight I've taken the last few months has been packed, this one was only roughly 25% full, as you can see in this picture:

3) As you read this, I'm on a flight to Ecuador for a 12-day trip to climb its two tallest peaks, the highest active volcano in the world, Cotopaxi, at 19,347 feet, and Chimborazo, the peak of which, at 20,548 feet, is the furthest point from the center of the earth in the world (its summit is over 6,800 feet farther from Earth's center than Mount Everest's summit because our planet isn't a perfect sphere – it's wider near the equator). Here are pictures of each, and details of the trip are here.

The adventure will be led by my buddy Paul Koubek, with whom I've climbed 50-plus days over the past 18 months. Some of our climbs include The Nose of El Capitan, Red Rock Canyon, Joshua Tree, and Mt. Whitney, to name a few – but for the first time, I'll be in a group (of 6) as this is part of an International Alpine Guides trip.

Alas, the weather forecast couldn't be worse – rain every day in Quito and rain, snow, and thunderstorms every day on the mountains – so we might not be climbing anything.

If so, I have friends in Bogotá and Medellín, Colombia, so I'll just hop on a quick flight and visit them!

This trip speaks to my low level of concern about the omicron variant – but that's because I'm triple-vaxxed, with two Moderna (MRNA) shots earlier this year and a Moderna half-dose booster last month.

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.