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Sunday Market Update: Will Indexes Go "Parabolic" from Here?

Sunday Market Update: Will Indexes Go "Parabolic" from Here?

I hope you've had a great holiday weekend, celebrating and just plain enjoying life with family and friends!

I continually remind myself to do just that, despite the stresses (big and small) that come with life, and seek to treasure each day as it arrives.

So what about this stock market?

The biggest surprise for many in last week's omicron-dominated, holiday-shortened trading week was the S&P 500 finishing at a new all-time high. I brought up just such a scenario two Sundays ago in "Market Breakout Ahead?"

But is it THE breakout that propels all the other lagging markets - the DJIA, Nasdaq, Nasdaq 100 and Russell 2000 - to new highs as well, and continues on into 2022?  

Reasons for Caution and Optimism

Ultimately, I'll let the individual stocks we have in the goodBUYs portfolio do the talking (+16% for the year since I started this publication in March - more on that for premium subscribers below).

But I'll give 50-50 odds for the market itself continuing higher.

One thing I do not like is that last week's rally saw the S&P make new daily highs - but on less and less trading volume:

There's no hard-and-fast rule that says "less trading volume = false breakout" - especially ahead of a major holiday. But rising levels of trading volume indicate lots of enthusiasm and big commitments, something that would be highly encouraging at this critical juncture.

The other thing I worry about - not so much for the coming week, but for January - is that I think a lot of traders are perhaps still too-eagerly bullish.

Let me put it this way - when too many of us are primed for playing the big breakout, Wall Street has a history of pulling the rug out from underneath us when we least expect.

A good example is January 2016, where a key index like the Nasdaq 100 (the QQQ ETF) teased everyone with a series of slightly-higher all-time highs through year-end 2015 - and then promptly lost 16% in the first 6 weeks of 2016 as Wall Street engaged in a round of profit-taking on the prior-year's gains.

All I'm saying is...with the markets, we have to expect the unexpected. I've had my biggest losses when I expected one thing, and the stock market delivered the opposite.

But I also said I give the market rally 50-50 odds of continuing into 2022. So what's the positive half of all this?

As I noted 2 weeks ago in "Market Breakout Ahead?" we have to respect a market (or stock) that keeps making new all-time highs.

There's also a wall of money that's primed to enter the market when January 3rd (the first Monday of the new year) rolls around. There's a reason that November through April tends to be the strongest part of any trading year as people put year-end bonuses to work, and make new investment allocations for the coming year.

And perhaps most importantly, I think the price of oil - which has yet to make a new near-term low - is confirming a hunch of mine since the omicron variant became public in November: It's only a speed bump in the global economic recovery.

I noted all this in last week's "Chart of the Week: Omicron Optimism" message (which had email delivery problems for many subscribers - now resolved - so apologies from me if you did not receive it).

Cutting to the chase...the conditions are prime for the markets to make a huge parabolic move higher if traders lose their fear of an omicron-related economic slowdown.

It could ultimately prove to be unsustainable. After all, inflation is still a concern. If oil prices were to resume their march higher, so will the drumbeat of pressure for the Federal Reserve to keep its hawkish stance and raise interest rates in 2022.

But that peak could be far higher than we might believe at this point.