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COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp

Click HERE to access the FSInsight COVID-19 Daily Chartbook.

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Our 2021 Year Ahead Outlook will be released Thursday, December 17th at 3:00 PM EST

Joining us for a webinar, which will include the Fundstrat Macro Team.  The following topics will be discussed:   

• Overall macro and strategy outlook 2021
• Economic outlook, what can we reasonably expect for GDP growth?
• Where are we in this investment cycle and what themes will dominate?
• We discuss key policy risks and upsides 
• New investment themes
• Full EPS and sector outlook
   
Don’t miss it!!!!

You must register in advance. 
Register here to attend –> REGISTRATION LINK

Should you have any questions, please do not hesitate to contact us at (212) 293-7140 or email inquiry@fsinsight.com

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STRATEGY: If history a guide, market volatility set to drop sharply 2021-2023
COVID-19 case growth continues to rise as the US in the midst of Wave 3, but the rate of change, or 7D delta is slowing.  For the last ~8 days, consecutively, we are seeing this 7D delta shrink.  It was:

+75,122 10 days ago,
+58,746 8 days ago,
+16,186 5 days ago,
+4,855 latest

So you can see the trend — the 7D delta is slowing.  And even CA, which has seen a tragic surge in daily cases, seems to be flattening.  So on the one level, it looks like Wave 3 is losing its momentum.  However, we are still in the midst of the holiday season, with friends and family gatherings, so it still remains possible for daily cases to see a renewed surge.

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp

Source: COVID-19 Tracking and Fundstrat  


Tune into our 2021 Outlook this coming Thursday
We are publishing our 2021 outlook this coming Thursday (12/17/2020).  We will be providing a comprehensive look at the framework we are using for 2021.  So there is a lot to be discussed, and we hope you can tune in.  
– Webinar details are at the top of this note

But don’t expect us to make huge changes to our views, either.


2020 VIX averaged 29.5, the 3rd highest in history… periods of high volatility are followed by 3-year plunges in VIX 
We have been providing constant and real-time updates to our market thesis and views.  But there are a few broader topics we will expand upon.  One of them is the expected trend in market volatility, with the VIX as a good proxy.  We have been looking at a spot VIX <20 as an important tactical signal (many funds likely to use increased leverage as VIX falls).  And history suggests that 2021-2023 might indeed be a period of low market volatility.  Look at the 30-year history of the VIX below (since 1990).  

– VIX has averaged 29.5 in 2020, the 3rd highest ever average level for any year
– As highlighted, every period of high avg VIX levels is followed by a sharp annual decline in VIX
– This lasts 3 years, and happened 2003-2005 and 2011-2014


COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp





But the VIX spot is not necessarily the most important measure of volatility.  We tend to look at the VIX futures curve (aka term structure) and historically, the VIX term structure is in contango (positively sloping) and since 2005, this is indeed the normal shape:

– But in 2020 average (solid blue line), you can see it is in backwardation
– the “current” curve is positively sloping, but still very high vs the 15-year average


COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp





If market volatility is falling (VIX), then we expect investors to buy “volatile companies”
In other words, we expect the VIX and the VIX futures curve to see sharp declines in 2021, and probably through 2023.  This should result in a pretty dramatic change in investor market preference.  Here us out:

– When market volatility is high, investors seek “low volatility stocks” to provide market ballast
– When market volatility is low, investor seek “high volatility stocks” to enhance beta

In other words…
– When VIX high, investors OW Growth (low vol)
– When VIX low, investors OW Epicenter (aka Cyclicals aka Value)


Since 2004, whenever VIX 4M-1M averages <-0.4 (current 12M avg is -1.1), Epicenter beats Growth by 3,200bp next 12M
The data bears out this rationale.  We have plotted the 12M avg spread of 4M-1M VIX (x-axis) and the Y-axis is Epicenter vs Growth, using SPHB (high beta ETF) and SPLV (S&P 500 Low vol ETF) as proxies:

– when in the 10th decile of 4M-1M VIX, which is -0.4 or lower, Epicenter trounces Growth over the next 12M
– Current 12M avg is -1.1

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp



In other words, if volatility is set to decline in 2021, which is our base case and also suggested by history, then we should see continued strong outperformance of Epicenter stocks.  We also see fundamental reasons to OW Epicenter:

– higher leverage of economic recovery
– stronger margin recovery (see the note from last week)
– lower valuations
– outperforms is inflation risk rises



Epicenter Trifecta list
Below is our current “Trifecta” epicenter stock list.  These are the stocks which were hit the hardest by the pandemic and have the greatest operating leverage to a re-opening.  And we like the earnings upside in these stocks, because of the massive cost reset.  The stocks are based on positive views coming from the trifecta of: (i) Quant (tireless Ken), (ii) Global Portfolio Strategy (Brian Rauscher, aka Rocky) and (iii) Technicals (Rob Sluymer).  

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp
COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp
COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp
COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp

Source: Fundstrat, Bloomberg


ADDENDUM: We are attaching the stock lists for our 3 portfolios:
We get several requests to give the updated list for our stock portfolios.  We are including the links here:

– Granny Shots  –>       core stocks, based on 6 thematic/tactical portfolios
– Trifecta epicenter  –> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Sluymer (Technicals)
– Biden vs Trump  –>   based on correlation to either candidate odds

Granny Shots:
Full stock list here –> Click here
Tickers: AAPL, AMZN, AXP, BF.B, CSCO, EBAY, GOOG, GRMN, GWW, INTC, KLAC, LEN, LOW, MNST, MSFT, MXIM, NVDA, OMC, PM, PYPL, QCOM, TSLA, XLNX

Trifecta Epicenter (*):
Full stock list here –> Click here
Tickers: AN, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, HAS, MAT, PII, MGM, HLT, MAR, NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY, FITB, WTFC, ASB, BOH, FHN, FNB, PB, PBCT, RF, STL, TFC, WBS, PNFP, SBNY, NYCB, MTG, AGNC, EVR, IBKR, VIRT, BK, STT, SYF, BHF, AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, MMM, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER, UHAL, HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC, LYB, EXP, MLM, CF, MOS, ESI, NEU, NUE, RS, SON, STOR, HIW, CPT, UDR, KIM, NNN, VNO, JBGS, RYN

Biden White House vs. Trump White House:
Full stock list here –> Click here

(*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.








POINT 1: Daily cases 181,931, +4,855 vs 7D ago.  Wave 3 7D delta slowing ~8 consecutive days
The latest COVID-19 daily cases came in at 181,931, up +4,855 vs 7D ago. 

– Daily case growth, measured as 7D delta, seems to be slowing
– For ~8 days now, the 7D delta is flattening
– Now it is +4,855
– But we are still in the holiday season, so the threat of renewed spread is high


COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


Source: COVID-19 Tracking Project  and Fundstrat


7D delta at +4,855…Wave 3 momentum still slowing
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average. 

– the 7D delta is falling for ~8 consecutive days now
– but we are still in a period of distortion from post-Thanksgiving
– plus, we are still in the holiday season, so renewed spread is a risk
– this week will provide a much clearer picture

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp



Source: COVID-19 Tracking and Fundstrat  



CA remains the state with the highest daily count in cases and also the biggest 7D jump in cases.  But COVID-19 is pretty bad everywhere.

 

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp
COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp



Source: COVID-19 Tracking and Fundstrat  


Is CA finally peaking?  Hopefully….


COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp

Source: COVID-19 Tracking and Fundstrat  



POINT 2: NIH study is another study further supporting the use of Olumiant (Baricitinib)
There is another study supporting the use of Olumiant (Baricitinib) for treating COVID-19 patients.  You may recall the FDA issued an EAU for Olumiant after a UK/European study supported its use as an effective treatment.  And what makes Baricitinib, an arthritis drug, even more interesting is that it was identified by a UK AI computer, BenevolentAI, as a potentially useful treatment. Below is an excerpt of our commentary about this drug back in mid-November.

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


Source: Fundstrat commentary from 11/16/2020



The latest study was by the NIH and studied patients treated with Olumiant alongside Remdesivir.

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp
COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


Source: NY Times


The study results were published Friday 12/11/2020.  And this study involved 1,033 patients.  The patients, in all cases, were given Remdesivir.  So this study was a look at whether adding Baricitinib would improve outcomes:

– 515 received the combination
– 518 received Remdesivir only


COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp




The results were promising for those with the combination treatment:

                               Combo     Control
– Time to recovery     7              8 days
– Mortality                5.1%          7.8%
– Serious events    16.0%       21.0%

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


https://www.nejm.org/doi/full/10.1056/NEJMoa2031994


So the study authors concluded at Olumiant + Remdesivir was superior to Remdesivir alone.  

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


https://www.nejm.org/doi/full/10.1056/NEJMoa2031994


I am not sure how many doses of Olumiant are needed to be effective.  This drug, considered a specialty drug, is expensive.  From the Eli Lilly website, here is the pricing info:

– 30-day supply of 2mg tablets is $2,265

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


Source: Eli Lilly




POINT 3: Wave 3 –> At the point where ICU scarcity leads to higher mortality
While we are tentatively hopeful, the reality remains that many communities are reaching capacity at hospitals, and more importantly, at ICU beds.  The NY Times has a good database that shows the available capacity.  Take a look at the map below and we can see the “red” are communities with limited bed capacity.  

– The red is widespread, not just in certain states
– literally, every state has some communities reaching the capacity of hospital beds/ICU


COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


Source: NY Times


The table below lists the ‘high population’ areas at >100% capacity of ICU.  Topping the list is Albuquerque, NM.  Reaching 100% of ICU capacity is a function of both the capacity of the community and a function of the prevalence of COVID-19.

– Albuquerque has 43 cases per 100k (same as 430 per 1mm), compared to 30 per 100k US overall.
– Baton Rouge, on the other hand, seems to have limited healthcare capacity as cases are 17 per 100k (30k US overall) but they are at 109% of ICU capacity

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


Source: NY Times


But the tragedy of March/April seen in the NY tristate area is now playing out in other parts of the US.  Cities are running out of capacity.  In fact, the Los Angeles Times had a few stories like this over the weekend.

– Central Valley hospitals (Fresno) are at capacity now
– CA has implemented strict lockdowns, but there seems to be growing resistance to these lockdowns

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp


Source: Los Angeles Times


And even Santa Clara is beginning door to door testing, in an attempt to slow the spread.  Santa Clara has a high Latino population (55%) and as we have written about in many previous commentaries, Latinos seem to be disproportionately impacted by COVID-19.  Door to door testing, however, is a big step, but not surprising, given policymakers there need to take some action.

COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to plunge 2021-2023 = history says Epicenter leads by 3,200bp

Source: Los Angeles Times

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