What Financial Markets Are Telling Us: Fears Of Omicron And A Government Shutdown Are Slowly Drowning The Bulls

Geopolitics and the link between globalization and health are now tearing into the markets, as the lack of a stop-gap measure by the US Congress means a shutdown is possible. With consumer sentiment already downtrending this is bad news. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. The action in EM currencies indicates the $US is somewhat weak. But there were also several negative factors across global asset classes. Copper and Oil charts are pointing to declining global GDP expectations. The US yield curve is bear flattening. Expect the S&P 500 to be range-bound over the next few days.

Derivatives markets are signaling that the lows are still yet to come for the equity markets. The volatility of volatility (VVIX) has gone bearish for a few days and the SKEW index of fat tail risk indicates the bulls are increasing their hedges while selling off stocks. Bond market volatility has been very high on both the short and long ends, while the options market continues moribund owing to limited participation. Combining this with the modestly negative charts for the major indices points to lower lows before ratcheting higher as the consolidation that began in mid-November has turned into a correction.

Yesterday I added a significant long position via the leveraged ETF UPRO. My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), and a large net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).