Weekly Wrap, Week ended 26/11/21.  A Black Sawn unhinges markets.

Omicron, the latest mutation of the Covid-19 virus, became a black swan for markets on Friday.  Suddenly, instead of confidence in a world recovering from Covid, market denizens thought we could be plunging back into lock-downs, quarantines, travel bans and slowing economic growth.  Israel, for instance, has already banned entry of visitors from all countries.  In Australia, the ACT has imposed quarantines on all incoming  Whether those fears have some reality or not is yet to be seen.  It will depend on how effective the current vaccines are against this new mutation.  Adaptations to current vaccines against an (as yet unproven) more virulent antagonist take time to develop.  Pfizer and BioNTech expect to take six weeks to adapt their mRNA vaccines to deal with the new variant, and about 100 days to ship.

The unknown is the biggest problem for markets.  The unknown stokes the fear which caused some spectacularly market plunges on Friday, e.g. -13% for U.S. Oil.  Until more is known - it's best to take a defensive posture.  The current turmoil could be over quickly - or take us back to the dark days of March, 2020.  No way to know.

In this week's edition, I'll look at the current state of play and suggest what to look for if a rebound is to occur.

Daily XJO chart:

XJO had been range bound for over a month.  On Friday, it broke the lower edge of that range (7312) and finished at 7279 got a loss of 1.73% on the day.  For the week, it was down -1.58%.  

Friday's action took the XJO almost down to the next level of support at 7254.  That seems certain to fall on Monday.  The 200-Day MA might then serve at support.  The 200-Day MA is at 7218.  A major horizontal support level lies at 7174.  That seems to be a likely target for a pause in play.

At this stage, a worst case scenario is for the XJO for fall down as far as 6832.  That would represent a fall of more than 8% from Friday's opening at 7407.

One Week Sector Changes:

Only three sectors were up this week.  Utilities did best +2.04%, but it fell -0.87% on Friday.  Better, relatively, than the XJO but not enough to suggest it will be a safe haven in any extended pull-back.  Materials was up +1.68%.  Some of the miners were starting to look promising as rebound possibilities (particularly FMG), but, on Friday, miners (XMM) fell 1.87%.  Property was up +0.84% for the week but fell -0.96% on Friday.  Expect further losses in those sectors early next week.

The two worst performing sectors were XIJ (Info.Technology) and XXJ (Financials).  XIJ is a barometer of economic expectations.  XXJ has been under pressure for a couple of weeks and fell -1.95% on Friday to be under the 200-Day MA for the first time in a year.  That could be a good indication, unless it recovers quickly, that we're in for a bear market.

This week's action also saw XXJ fall below the high back in February 2020, which occurred just before the bear market which eventuated in March, 2020.  

NewHighs-NewLows Cumulative.

For long-term investors, this is the most important chart to watch.

While the NH-NL remains above its 10-Day MA, long-term investors might feel comfortable in holding their investments.  If it breaks below the 10-Day MA, they might then take defensive action.

This chart has kept investors in this long bull market dating back to mid-2020.  It looked precarious back in late September into October when the XJO pulled back, but the NH-NL CUM didn't cross below its 10-Day MA.  The two lines are once again close together.  If we get another poor result on Monday, this chart could cross below its 10-Day MA.  That would be a sell signal for Long-term investments in Index ETFs.

Stocks in the ASX100 above the 200-Day MA.

% of ASX100 stocks above the 200-Day MA was at 58% this week.  That's the first time since March that such a reading below60% has been recorded.  That is still a bullish number, but down from 68% the previous week.  So another week like this week, and we could see a bearish reading for this metric.  

Strong Stocks v Weak Stocks.

This is a development of my own making.  I mark up all the stocks in the ASX100 according to seven criteria.  Any stocks positive on all 7 criteria are regarded as Strong Stocks (SS).  Any stocks negative on all 7 criteria are regarded as Weak Stocks (WS).

This week saw a negative result in the SS v WS 7 SS and 11 WS.  This is used by me to calculate a cumulative SS-WS chart.  This is a measure similar to the NH-NL Cum (above).  It's a good guide for position traders rather than long-term investors.  While the Strong-Weak Cumulative chart remains above its 10-Week MA, position traders can continue to hold Index ETFs.  The only time this chart was in trouble this year was back in late March when XJO had a significant pullback.  It is once again looking precarious.

Conclusion:

Fear struck our market this week and the XJO plunged down into a medium-term bearish trend.  Just how real is the danger from Omicron is unknowable at this stage.  If markets continue to crumble, long-term investors have four options:

1. Go to cash and hope to pick the bottom and then re-enter the market.  That's always a difficult trick to pull off.
2. Adopt a defensive posture by altering allocations between bonds and stocks if you have a diversified portfolio.  
3. Hedge your portfolio by buying Bear,  the ETF which reacts inversely to the XJO resulting in a neutral position.
4. Hang on for grim death and hope this all just blows away very quickly

Financial advisers will usually opt for No.4.  (You may be able to come up with more options.). It's up to you and your level of tolerance for risk.

Here's the weekly chart for Bear going back to before the March, 2020 bear market:

If the weekly PRT Bands turn yellow, it might be worth considering Bear as an option.