Stuffed
Posted on Sunday, November 28th, 2021
Short week calls for a short note. My brother in law came all the way from Dallas for the first time since 2019. We spent an inordinate amount of time watching football and stuffed ourselves. That’s the short version. The long version includes the part about me embarking on the first diet of my life. We really did eat way too much.
Short weeks on Wall Street always seem to have a way of becoming very long weeks. We stuffed 5 days of trading into 3 and a half. The Nu or Xi or Omicron variant (take your pick) had the market on edge on Friday. We had this to say in our note last week.
The market which looked to breaking in favor of the bulls turned lower on a potential COVID lock down in Germany. The technicians on the Street call it a failed breakout. It isn’t quite one yet but next week may prove decisive. There were a very large number of options that expired on Friday. It was the second largest one of 2021. This means that there is potential for the market to become unlocked. This potential to unlock could see the market move lower but I think the bulls may have gotten lucky here. Holiday weeks are usually up weeks as no one likes to take on potentially violent short position when they are trying to relax with the wife and kids. It is more likely that the market continues to move in favor of the bulls. No guarantees but that’s the way to bet.
We have been writing for the last two years that the narrative does not really matter when it comes to the stock market. The narrative is really just the news item that gets blamed. You cannot predict which rock begins the avalanche but you can predict if the avalanche (market) is positioned for greater instability. The thing that matters most when it comes to the market is how players are positioned. The options expiration the week before was a big one and we knew that the market had potential to become unlocked and move with more volatility. It has been our experience that markets tend to go higher on holiday weeks. Unfortunately, this one was a bit different. The narrative was the Omicron variant but it was the options market that had the stock market primed for a big move. The market is still in negative gamma which means that any move in the market is accelerated. Volatility is the name of the game when we are in negative gamma. We are not an epidemiologist but our slight knowledge of virus’ is that they tend to evolve to be more contagious but less deadly. We expect more of the same from Omicron.
The failed breakout in small caps needs to be watched closely. My gut tells me that it is a massive head fake and will turn out just fine for the bulls. The market may have overreacted to the Omicron news. The price of oil was down 12% on Friday. Chevron, the large US oil company, finished higher for the week. No guarantees but that’s the way to bet.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
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Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.