Nobody want to be a hero in front of FOMC and technicals have suffered some damage. But base case remains YE rally

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

We publish on a 4-day a week schedule:

Monday
Tuesday
Wednesday
SKIP THURSDAY
Friday

STRATEGY: Nobody want to be a hero in front of FOMC and technicals have suffered some damage. But base case remains YE rally

US is waiting for Omicron surge
Daily cases in the US have flattened recently, and if the world was only dealing with Delta, policymakers would likely be declaring the pandemic is moving to the endemic stage. But for now, the US is waiting for the Omicron surge seen in South Africa.

– as shown below, USA cases have been stable for the past 3 weeks
– and positivity rate seems to be rolling over
– all this shows is that Delta wave is nearing its end
– but Omicron is not yet widely reflected

Even the 7D delta shows that cases are not really rising week over week (versus same day 7 days ago) and is a sign of a flattening trend. And in the absence of a new strain/variant, we would look at this more conclusively.

And even positivity rate at 8% is down from > 10% a few weeks ago. We know testing is adequate and this drop in positivity is actually a good sign. But given the Omicron variant lurking, we think positivity rate may soon surge.

– but as many nations report, Omicron has seen less severe hospitalization risk
– but the more appropriate expectation is for a panic

COVID is surging through Northeast and Midwest, but FL/TX/CA not erupting
And just to highlight the continuing trends in the US (see the states below in point #3), cases are surging in some regions:

– Northeast, not surprisingly, due to flu season
– tame in the FL/Southeast
– tame in West Coast

STRATEGY: Equities on hold until FOMC meeting this week (12/15)
After reaching an all-time high last week, equities started this week with a broad sell-off. There are several possible explanations, but in my view, the following are the 3 drivers:

– FOMC meeting this Wednesday, and no investor goes “risk-on” into FOMC
– equities reached an all-time high last week and now “we consolidate”
– UK policymakers pushing vax mandates is a reminder the US still has to get through the Omicron wave

So in short, Monday was a tough day for investors. Fundstrat’s Head of Technical Strategy, Mark Newton, warns that underlying technical damage suggests markets could struggle (click here to learn more):

– the key is for S&P 500 to hold 4,612 and QQQ0.07%  to hold 387.60
– he warns 2021 could look like 2018, which was terrible for stocks, until the very last week of Dec
– this raises the stakes into this week’s FOMC meeting

Equities have been treacherous for much of 2021, reflecting the tumult of the reopening coupled with natural glitches and challenges. And with only a few weeks left in 2021, there are concerns equities could weaken into the end of the year. While this is a possibility, we think there is a lot of noise in front of the FOMC meeting, and lingering hysteria around Omicron. There are still several positive catalysts:

– FDA could approve COVID-19 therapeutics such as Pfizer pill
– Omicron could peak in South Africa
– Omicron could peak somewhere else like UK
– Fed meeting will be in the “rear view mirror”
– Seasonals are still strong
– Sentiment remains cautious = contrarian

So, while Monday was unsettling, consider where markets were a week ago:

– exactly a week ago, the S&P 500 was at 4,592
– closed last Friday at a new all-time high 4,712
– a gain of 120 points in 1 week

That was not the consensus view and in fact, consensus was calling for a top in markets, as they saw Fed hawkish pivot as the demise of equity bull market.

SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing positive relative trend:- Energy
– Basic Materials
– Technology
– Transports
– Discretionary

– sort of Financials/Banks

These are all cyclical groups. And also have general positive exposure to reflationary trends. Inflation, incidentally, in isolation is not a bad word. The real risk to markets is:

– too much inflation hurting consumer confidence
– or unanchored inflation expectations, fear of uncontained inflation

This is not necessarily what markets seem to be pricing. If markets were worried about either of the above, Defensive stocks or Growth stocks would be leading. Instead, we are seeing Cyclicals lead.

Into YE, our recommended strategies are:

– Energy
– Homebuilders (Golden 6 months) XHB
– Small-caps IWM-0.41%
– Epicenter XLI-0.10%  XLF-0.38%  XLB-0.50%  RCD
– Crypto equities BITO-2.19%  GBTC-2.23%  BITW-2.01%

Into 2022…
– Industrials

30 Granny Shot Ideas: We performed our quarterly rebalance on 10/25. Full stock list here –> Click here

POINT 1: Daily COVID-19 cases 216,489, up +10,872 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 216,489 vs 205,617 7D ago, up +10,872
• Daily cases ex-FL&NE 212,624 vs 202,903 7D ago, up +9,721
• 7D positivity rate 8.0% vs 8.3% 7D ago
• Hospitalized patients 60,540, up +10.5% vs 7D ago
• Daily deaths 1,499, up +22.0% vs 7D ago

*** Florida and Nebraska stopped publishing daily COVID stats updates on 6/4 and 6/30, respectively. We switched to use CDC surveillance data as the substitute. However, since CDC surveillance data is subject to a one-to-two day lag, we added a “US ex-FL&NE” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.

The latest COVID daily cases came in at 30,107, up +2,100 vs 7D ago. The Thanksgiving distortion appears to be clearing out as per the more consistent trend in the recent data. As such, Wave 4 is clearly underway; this is not surprising, and is our base case. We expect this surge to peak below the wave 3 peak of 300,000 cases per day. Case roll over will likely resume in the near future as booster vaccine rates are increasing.

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Rolling 7D delta Thanksgiving distortion beginning to clear out…
The rolling 7D delta Thanksgiving distortion is beginning to clear out as evident by the more consistent trend in the data. Nonetheless, we’ll continue to monitor the data closely.

33 states are seeing a rise in cases while cases continue to decline in the remaining states…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling, and the other where cases are rising

In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple. 

• The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
• We also calculated the number of days during the recent case surge
• The US as a whole, UK, and Israel are also shown at the top as a reference

Hospitalizations, deaths, and positivity rates are rolling over amidst case rollover…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Net hospitalizations peaked below the Wave 3 peak and are currently rolling over
– Daily death peaked slightly above the Wave 2 peak and are currently rolling over
– As per the decline in daily cases, the positivity rate is currently rolling over

POINT 2: VACCINE: vaccination pace accelerates as boosters become more widely available…
***The Thanksgiving distortion appears to be mostly cleared out.

Current Trends — Vaccinations:

• avg 2.0 million this past week vs 2.3 million last week
• overall, 60.4% fully vaccinated, 71.3% 1-dose+ received

Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).

– Currently, all states are near or above 90% combined penetration
– Given the 2.5x multiplier, all states besides AL, AR, IA, HI, LA, MS, IN, WA, WV, OR, TX, OH, ID, MI, MO, and GA are now above 100% combined penetration (vaccines + infections). Again, this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

There were a total of 1,167,860 doses administered reported on Monday down 16% vs 7D ago. With the introduction of the Omicron variant, we’ve been seeing the vaccination pace accelerate. Also, the same catalysts remain in place:

• Proof of vaccination required by many US cities and venues
• Booster shots
• Full FDA approval of Pfizer COVID vaccines (hopefully it could help overcome vaccine hesitancy)
• Biden’s vaccination plan

The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.

This is the state by state data below, showing information for individuals with one dose and two doses.

In total, 438 million vaccine doses have been administered across the country. Specifically, 237 million Americans (72% of US population) have received at least 1 dose of the vaccine. And 201 million Americans (61% of US population) are fully vaccinated.

POINT 3: Tracking the seasonality of COVID-19

In July, we noted that many states experienced similar case surges in 2021 to the ones they experienced in 2020. As such, along with the introduction of the more transmissible Delta variant, seasonality also appears to play an important role in the recent surge in daily cases, hospitalization, and deaths. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.

The possible explanations for the seasonality we observed are:

• Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
• “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors

If this holds true, seasonal analysis suggests that the Delta spike could roll over by following a similar pattern to 2020.

We created this section within our COVID update which tracks and compare the case, hospitalization, and death trends in both 2020 and 2021 at the state level. We grouped states geographically as they tend to trend similarly.

CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities.

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.

DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.