LIVE MARKETS Jefferies, BofA suggest small caps could be poised for snapback rally

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JEFFERIES, BOFA SUGGEST SMALL CAPS COULD BE POISED FOR SNAPBACK RALLY (1112 EST/1612 GMT)

The omicron wave may soon give way to a snapback rally in small and mid-cap U.S. stocks, Jefferies and Bank of America Global Research said in separate reports Wednesday.

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Small-caps have borne the brunt of investor concerns that rising case counts could weigh on the economy. Yet signs that the omicron wave are leading to fewer hospitalizations will likely bode well for the shares of smaller companies in the new year, BofA strategists wrote.

“We find that small vs. large-cap performance has had a higher correlation with new hospitalizations (which have recently ticked down) than new cases over the past year,” the report noted.

Attractive valuations in the benchmark Russell 2000 index compared with large cap equities should also bolster returns in the coming quarter, noted Jefferies. The price to earnings ratio of the Russell 2000 has fallen to 25 from 32 at the end of January, the report noted.

“Small should beat large by over 6% over the next 12 months,” Jefferies said.

“The average January rise for small in January stands at 3.7%, but when Q4 is down, they bounce back by 4.7%. When Q4 is down, the smallest of the small gains 8.4% the next January versus 7% in all periods,” the report said.

Among Jefferies’ buy recommendations are Dave and Buster’s Entertainment Inc (PLAY.O), Urban Outfitters Inc (URBN.O), and National Vision Holdings Inc. (EYE.O).

(David Randall)

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DEFENSIVE MUCH? (1035 EST/1535 GMT)

Despite the S&P 500 (.SPX) sitting less than 2% from its intraday record high set on Nov. 22, stocks have been rattled by concerns over a hawkish Fed, the Omicron variant spread and uncertainty surrounding chances of the Build Back Better plan passing in Washington.

As such, the tone has become more defensive in the final month of the year, with sectors such as consumer staples (.SPLRCS) and utilities (.SPLRCU) the top performers thus far in December, while groups associated with higher growth prospects such as consumer discretionary (.SPLRCD) and tech (.SPLRCT) have lagged, raising the question as to whether this portends stormy seas for the broader market.

In a recent note, Bespoke Investment Group looked at the outperformance, using ETFs, between staples (XLP.P) and discretionary (XLY.P) and found that when staples outperformed discretionary by 10 or more percentage points on a month-to-date basis, the S&P 500 struggled in the intermediate-term going back to 1990.

Looking at the sector performance through Tuesday's close, staples were outperforming discretionary stocks by about 9.5 percentage points:

Consumer staples are on pace for their widest monthly outperformance this year

Jason Goepfert at Sentiment Trader also looked at the recent strength in staples and found that the percentage of staples trading above their 50-day moving averages reached 90% last week, while fewer than 25% of stocks on the Nasdaq (.IXIC) managed to hold that level, the widest spread between the two in at least 30 years.

However, unlike Bespoke's findings, Goepfert found that comparing the two wasn't a good predictor for a market fall, with only one instance leading to a "large and protracted decline" since 1990.

(Chuck Mikolajczak)

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U.S. STOCKS CREEP AROUND IN EARLY TRADE (1003 EST/1503 GMT)

Wall Street's main indexes are roughly flat early on Wednesday, as worries lingered over the Omicron variant of the coronavirus and what it may mean for the global economic recovery.

As stands, the S&P 500 is on track for a second straight close above its 50-day moving average (DMA), which sits below the market, at around 4,618.

The DJI is just shy of its closely watched intermediate-term moving average, which is resistance around 35,600. The Nasdaq's 50-DMA is up around 15,500.

Here is where markets stand in early trade:

earlytrade12222021

(Terence Gabriel)

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S&P 500: BULLS GET A BOOST (0900 EST/1400 GMT)

In the wake of Tuesday's strong bounce, the S&P 500 index (.SPX) is only down around 1.3% from its 4,712.02 November 10 record close. read more

Meanwhile, the 5-day moving average of the CBOE equity put/call (P/C) ratio, which can be viewed as a contrarian measure of sentiment, is suddenly cooperating with bulls read more :

PC12222021

The measure, which had risen to readings of 58% and 58.2% on December 6 and December 16, is now deflating to 51.8%. Of note, since bottoming at 40.2% in mid-June 2020, the P/C measure has ranged between high-30% and low-60% readings.

If this pattern is continuing then the measure appears to have signaled that market sentiment became sufficiently bearish over the last several weeks or so of trading, that the SPX can mount a more sustained recovery.

Therefore, traders will be watching to see if the P/C measure can oscillate back below 40% as the SPX rallies.

A P/C measure breakout much above the low-60% area, however, may instead signal the onset of panic. The measure peaked at 105% on March 17, 2020, in what was a more-than-30% S&P 500 collapse. read more

(Terence Gabriel)

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Terence Gabriel is a Reuters market analyst. The views expressed are his own

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