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Volatility Will Find Other Drivers Besides Fed and Omicron

End-of-year pressure on underperforming fund managers likely to drive rotation, Deporre says.

The U.S. stock market has been in a tricky state, with solid stocks being hung out to dry for no reason. 

That's good news for savvy investors.

“Worries about the omicron variant appear to be easing, but there is still substantial uncertainty, and there is concern about restrictive governmental policies that may have an economic impact," said James “Rev Shark” Deporre in Real Money. "There is little appetite for shutdowns, but travel restrictions appear likely.”

According to Rev Shark, the poor trading action on Tuesday was more a function of concerns about Fed policy than worries about Covid variants.

“There was some hope that the economic impact of the variant would cause Jerome Powell to be more cautious about tapering, but he was much more hawkish than was anticipated,” he said.

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The market has never really embraced the idea that inflation was 'transitory,' so it is positive that the Fed's view now aligns with the market. “It isn't all bad that there will be a more concentrated effort to deal with inflation at an early stage,” Deporre said. “The stimulus impact of Fed policy will be missed, but the more responsible monetary policy will be appreciated.”

Rev Shark said the market still has work to do in order to sort out both the Fed and the omicron variant, and that’s reflected in the very messy technical action. “There is an endless number of stats that show how badly the average stock has been performing versus the indexes,” he noted. “Large parts of the market are deep into bear markets, while the S&P 500 and Nasdaq don’t reflect that at all.”

One of the best illustrations of how the indexes are misstating the strength in this market is how hedge funds have been performing versus the S&P 500.

“The S&P 500 is up about 21.5% year to date,” Deporre added. “According to Aurum.com, at the end of October, the average year-to-date return for hedge funds was just 7.6% [...] November numbers will be out later, but it’s unlikely that the wide gulf in performance has closed very much.”

“With so many money managers underperforming their benchmarks, there will be extreme pressure to create performance in the final month of the year,” he said. “That will likely increase volatility and intensive rotational action as money managers hunt for alpha.”

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