Covid Fears Pulled the Markets Down. Here’s When You Should Really Start to Worry.

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Shares fell sharply in a holiday-short trading session on Friday on news from the Omicron edition.

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Spencer Platt / Getty Images

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It’s not over until it’s over. And the pandemic is not over yet. But while Covid ruined Black Friday for investors, all is not lost for this bull market.

A new coronavirus variant discovered in South Africa, dubbed omicron, Shares fell sharply in the holiday-shortened trading session on Friday. The S&P 500 index dropped 2.2% for the week, while the Dow Jones Industrial Average dropped 2%. The Nasdaq Composite fell 3.5%.

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Knee-jerk reactions were abundant. For example, Zoom Video Communications (ticker: ZM) rose more than 5% on Friday. It had lost 15% on Tuesday after recording earnings. Investors were worried about slowing post-pandemic growth for the collaboration software company. Now, the stay-at-home business seems to be coming back.

There’s no time to panic. “The S&P 500 has formed a cushion over the past seven weeks, and a 4% to 5% pullback alone will not change its longer-term trend,” says Instinet strategist Frank Capellari.

The index is still up about 5% over the past seven weeks. That’s one reason why a small drop doesn’t belong to Capellari right now. Still, a deeper drop — more than 5%, without buyers dipping — would cause him to worry. He is looking at 4525, the S&P 50-day moving average as a break-even level to gauge his level of concern.

Another reason not to worry is that there was no one in the office. Thanksgiving is, essentially, a four-day weekend for much of the US. Yes, the market has voted and stocks have gone down. Yes, the Cboe Volatility Index—VIX— jumped 54% on Friday. But trading volumes were low.

According to Businesshala, VIX December futures traded around 210,000 contracts on Friday. The daily average volume is usually 520,000. US stock exchanges traded less than nine billion shares on Friday. An average day is close to 11 billion. More than 16 billion shares were changing hands back in a single day in March 2020, when Covid first started scaring investors.

“The pullback comes at a time when many market players are out … contributing to low volume and high volatility,” writes Fairlead Strategies market technician Katie Stockton. “Momentum has been weak enough to give us pause,” she adds, but she doesn’t want to overreact and will wait for a clear sign when volume returns this coming week.

The VIX closed at 28.6 on Friday. If the fear gauge closes above 25 this coming Friday, it would signal a period of heightened volatility for investors—and then there’s Stockton concerned.

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Friday was a setback, but investors needn’t worry too much right now. The time to panic, if it does come, will be down the road. Trading in early December will offer a better understanding of how investors feel about the latest COVID version.

More details about the new variant will be revealed in a few days. Investors will be able to reconsider what they learn about Omicron, how the government reacts against it, and the impact of new antiviral treatments.

“Market participants are afraid of going back into the Covid lockdown,” says Bill Smed of Smed Capital. He explains that the pandemic war continues, but people are getting better at coping. “This optimism collapses” [are] Good buying opportunity.”

It’s an optimistic take on Friday’s action, but it’s one that has worked for months.

write to Al Root [email protected]

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