Santoli’s Wednesday market notes: The S&P 500 takes a breather just below a key level

Published Wed, Dec 8 20212:13 PM EST

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. Low-drama digestion day after a ripping two-day rally makes plenty of sense and is probably healthier than a further immediate lunge higher. Some noteworthy aspects of the ramp this week: Two consecutive days with 80%+ upside volume shows urgent accumulation of stocks as investors rebuild equity exposure following the forced flush that ended last week. Forward returns following such a two-day buying stampede have tended to be strong, though near-term it's more of a coin toss. Combination of existing, tested leadership groups reasserting themselves (semis, homebuilders) and some dumpster diving among the discarded groups (unprofitable tech and most-shorted names both outperformed yesterday). Creates an interesting set-up, plenty of evidence for "own the winners" logic yet a lot of dinged-up merchandise lying around for people trying to grab names that could move fast if only on pure mean-reversion snapback. Noted late yesterday that after the S & P 500's recovery back to the Nov. 5 and Nov. 24 (pre-Thanksgiving) levels, the direction of surprise on Covid news was to the downside. In other words, the market had priced in the likelihood that omicron was manageable and not a big macro threat. Muted response today to the Pfizer report showing three doses protect vs. omicron supports this idea. Taking a breather right under the 4,700 level that has acted as a bit of a barrier for more than a month. The vigor of the rebound suggests last week's low around 4,500 should be trusted until proving otherwise, and with cleaner positioning after the deleveraging of aggressive accounts last week perhaps the upside seasonal bias can kick in. But the tape needs to prove it. The good news is that while Wall Street was undergoing another scare and shakeout, the U.S. recovery has remained brisk by most indicators. Jump in job openings reported today along with a rise in mortgage applications. With three weeks left in the quarter, Atlanta Fed sees Q4 real GDP above 8.5%, which at least leaves open the chance that fourth-quarter earnings can move higher. Small caps holding a bid, which is a plus but also a measure of how deeply the Russell 2000 was sold down. For most of the past year, semis and small caps traded together as "cyclical beta," but they have gone their separate ways the past several weeks. Nothing says that gap must close but suggests room for convergence. Wall Street strategists rolling out year-ahead forecasts are converging – as they typically do – on a prediction for modest further upside in the S & P 500. Their targets ranging from down slightly to up 13%, the average and median clustering near +5% to 8% so far. Treasury yields relaxing higher as well, some re-steepening of the curve today even as the market prices in a high likelihood of two to three hikes next year. Still think Powell's plan is "rush to finish the taper and then hope inflation eases enough to give us a chance to wait and reassess." All plausible given the broader dynamics: coming off three great years, earnings deceleration and multiple compression likely according to history, Fed transitioning toward tightening, mid-term election year. But then, the market almost never conforms to the long-term average high-single-digit return in a given calendar year. History says +20% is more likely than a down year and both are more common than an up 8% to 12% year, oddly enough. Some comfort, at least, in the fact that the Street is not aggressively bullish here. Market breadth is solid today, 2:1 up:down volume, equal-weight S & P 500 outperforming. Lethargic indexes today allowing VIX to bleed lower still. Cracking beneath 20 would be another marker that the tape has weathered the deleveraging jolt and is back to boring, grinding rhythms. We'll see.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, December 8, 2021.

Brendan McDermid | Reuters

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.