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The technical picture for the S&P500 is mixed, with momentum still weak. We also note RSI has rebounded to mid range. The next 2 days should give some answers. Interesting to note, that only roughly 1/3 of all stocks (as of 12/20 close) are trading above their 20-day moving average (m.a.) while 38% are above their 50-day m.a. Finally, the percentage of S&P500 stocks above their 200-day m.a. is just 58% as of 12/20/21 close. That’s an astoundingly low number considering that the S&P500 is so close to all high high territory. This  explains how the broader market has suffered more damage when excluding the Large-Cap Technology stocks since mid-November. Investors are increasingly selective and searching for quality/stable earnings growth at attractive valuation multiples. 

What emotion is driving markets now? it's clearly "Fear" according to CNNMoney's Fear & Greed index. In a nutshell, too much fear can sink stocks well below where they should be. When investors get greedy, they can bid up stock prices way too far. Markets are recovering in US pre-market, up 0.3%-0.8%. Europe is in the green too gaining 0.7%-0.9%. Earnings are helping the market to find support. Nike and Micron stocks gained afterhours 3.8%% and 6.8% respectively, after reporting better than expected.  

In early US premarket risk-off sentiment continues with large cap stock down 1.7%, as investors digest lockdown fears due to Omicron cases. European stocks are tumbling 2-2.5%. The timing is particularly delicate as it follows central banks announcements of gradually tightening monetary policies in response to high inflation. Markets may also be more volatile as participants are hesitant to initiate new positions before the new year and volumes are typically lower around the holidays. Volatility (CBOE Vix Index) is up 33% this morning, and the US 10 Year Treasury Note stands at 1.37%. Intra-day volatility is high as illustrated below (chart by Bloomberg).

According to BofA research, this month has seen very large outflows from funds investing in developed markets stocks. Previous large outflows have occurred during the Covid-crash in March 2020 and in the December 2018 crash. In each instance, these have been indicators of capitulation and when investors' sentiment starts turning positive. Amid the uncertainty of where markets are headed, will investors continue reducing risk in their portfolio or will this be remembered as another buying opportunity? Sector rotation has been very strong this month with new tech, high-growth & software largely underperforming the rest of the market.  

Bloomberg reported sell-side analysts are particularly bullish on European banks stocks for next year. Recent market weakness, combined with rising earnings estimates imply a roughly 22% potential gains for the Stoxx 600 Banks Index. It's about double the return versus what's expected for the broader Stoxx Europe 600. According to analysts, strong earnings recovery, tighter monetary policy outlook (rising rates particularly), and relatively low valuations are factors supporting the outlook for European banks. Similarly, in the US momentum for banks has been particularly strong amid a buoyant economy and Fed tightening. JP Morgan yesterday named Bank of America its top pick for 2022.