The stock market has almost entirely recovered from the Black Friday-Omicron plunge and the price action outlook is beginning to look bullish again, with last Tuesday’s price action showing very strong conviction off the lows from the bulls. 

Before we move onto assessing what’s coming for this week, let’s take a quick look at some significant events from last week:

  • Strong indications from US health officials that the Omicron variant is pretty weak compared to prior variants
  • US financial regulators a838
  • Re-discussing increasing regulations of retail option trading.
  • Weakness in Bitcoin, reaching a low of $41K before recovering
  • A bloodbath in enterprise software, with two growth darlings; DocuSign (DOCU) and Asana (ASAN) experiencing 30%+ declines on disappointing earnings reports.

Major Events This Week

FOMC Two-Day Meeting on Tuesday and Wednesday

We’ll hear from the Fed this week, with the last FOMC meeting of the year occurring on Tuesday and Wednesday. Inflation is at highs not reached since the days of 1970s stagflation and showing little sign of letting up in the near-term.

Following Fed Chair Powell’s change-of-tune when testifying before the Senate Banking Committee last week, we should expect the Fed to ditch the “transitory” talk and begin acknowledging the risks of persistent inflation that could last more than a few months.

The shift of tone plays into the announcement from the last FOMC meeting, in which they intend to taper purchases of treasuries and mortgage-backed securities. There’s a lot of speculation from macro analysts that this shift to a more hawkish point of view is likely to lead to rate hikes in the near future.

Quadruple Witching Event on Friday, December 17

Quad witching is a quarterly event where the expiration for several different derivatives contracts happen to fall on the same day. This creates a huge amount of derivatives trading activity which flows through to their underlying markets. 

The typical expectation on a quad witching day is an increase in volatility and general wonky trading behavior.

You see, when a derivative contract expires, holders and writers of that contract are forced to act in some way. They might let it expire, roll the contract to the next expiration, exercise the contract, or simply close the position.

When the expirations of equity futures, equity options, equity futures options, and options on equity indices all fall on the same day, this forces a ton of traders to act at once, which increases volume and often volatility. 

The three previous quad-witching days this year: March 19, June 18, and September 17 have all delivered negative returns on mostly average volatility. Conventional trading wisdom is that markets typically decline on quad witching days with increased volatility, however, Jeff “The Almanac Trader,” did a study of all quad witching days between 1983 and 2020 and found that performance is pretty mixed, with a slight upside bias.

 

Major Economic Data Coming This Week

Housing Data

On Thursday we hear from the Census Bureau on Housing Starts and Building Permits data. Permits are a leading indicator, as you get a permit to build before you start building, and last month we saw a rise in permits and a decline in housing starts.

This chart from Briefing.com shows the considerable divergence in permits and starts. In the coming months we should see an uptick in housing starts which is sure to strengthen the already expensive US housing prices. 

Stocks to watch:

  • Homebuilders (XHB, LEN, TOL, DHI, BZH)
  • Building products (XHB, HD, LOW, MAS, AOS, BLDR)

Retail Sales

Retail sales, along with inflation and unemployment have been the key metrics to track America’s economic recovery post-lockdown. Surprising nearly everyone, retail sales growth has been going absolutely parabolic, far outpacing the trend in normal years. 

On Wednesday we get the retail sales data for November, the second biggest shopping month of the year behind December. The report should address the concerns that many investors in retailers have this year regarding some early data showing a YoY sales decline during Black Friday Cyber Monday weekend.

Stocks to Watch:

  • Retailers (XRT, KSS, M, DDS, DLTR, BBBY, BBY)

Producer Price Index (PPI)

The PPI measures inflation of input costs–in other words, how much is the cost to produce goods going up or down? This is a leading indicator of sorts, because its typical for increased input costs to pass-through to consumer prices, so you’ll probably see inflation at the producer level before you see it on the consumer level. 

Inflation is one of the key themes driving this market. The ebbs and flows in investor psychology around inflation is what fuels the constant back-and-forth between long duration growth stocks like AMZN and TSLA and “reflation” stocks like commodity producers and industrials. 

September saw the highest YoY increase (8.6%) in the final demand index since the BLS started tracking the data in 2010.

Key Earnings Releases to Watch Next Week

  • Wednesday: Lennar (LEN)
  • Thursday: Accenture (ACN), Carnival Cruise Lines (CCL), FedEx (FDX)

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