4 reasons stock market yesterday is like a bad Nicholas Cage movie = so bad, it's good

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Things are so bad, that markets can bottom on bad news

I am a huge Nicholas Cage fan. Some of his earliest movies had an influence in my youth — Peggy Sue Got Married, Moonstruck, Leaving Las Vegas, the Rock, Con-air, etc. Even some of my all-time favorite movies are Nicholas Cage movies like Family Man, or It Could Happen to You. But as with any legend, he has made some movies that have been panned. That is why this story by Inverse.com caught my attention.

• Nicholas Cage made the WORST sci-fi movie of all time and also his BEST
• this made me think of the investment environment
• so bad, it is good

4 reasons yesterday is like a bad Nicholas Cage movie

There are 4 reasons we believe the current market environment reminds me of a “bad” Nicholas Cage movie:

• GDP 1Q2022 print was -1.4%, below consensus of +1.0% = weaker economy = doing Fed’s work = so bad, it is good
• Retail AAII sentiment came in at -43%, 6th worst since 1987 = contrarian buy signal = so bad, it is good
• Nasdaq underperformed S&P 500 by -11% past 6M, one of 13 worst stretches since 1985 = outperforms S&P 500 77% by 950bp = so bad, it is good
• Facebook reported weakening 1Q2022 results but stock rallies +20% due to pessimistic expectations = so bad, it is good

See the pattern? As is the old adage, markets bottom on bad news, not good news

GDP 1Q2022 negative, but the headline is not the focus of markets

1Q2022 GDP came in at -1.4%, below consensus of +1.0% and down sharply from +6.9% in 4Q2021. The details are not as bad as the headlines. But the implication for me is as follows:

• 1Q2022 GDP undermines those who see the US economy is so hot, and the “Fed needs a hard landing”
• Core PCE is still healthy +5.2% QoQ but this is below the Street consensus +5.5%
• Friday 4/29 is PCE core deflator. This is a key component followed by Fed
• Street looking for 5.3% YoY, down from 5.4% YoY in Feb.
• Below 5.3% YoY would be considered a positive development for markets, in our view.

As shown below, 6 components were the primary contributors to a decline in GDP:

• 6 items subtracted a collective -4.8% from 1Q2022 GDP (vs year ago)
• The biggest subtractors were imports, exports, inventories, fed spending
• and also gasoline and clothing

So, it was not only an inventory correction. Govt spending is cooling. And gasoline and clothing were big contributors in 2021 due to supply chain shortages and sizable increases in price.

• does this change the Fed path to hikes?

As shown below, on Thursday’s trading session, there was a modest uptick in the number of Fed hikes expected by December 2022. But:

• # hikes expected by YE is 9.6
• # hikes expected last Friday 4/22 was 10.1
• # hikes expected has fallen given incoming data over the past week

SENTIMENT: So bad, only 5 times when retail sentiment worse= risk/reward 6M-12M STRONG

As our clients know, we like to use the AAII (American Association of Individual Investors) sentiment survey. This weekly survey has been conducted since 1987 and we believe it generates a lot of signals at the extremes when the survey is very bullish or very bearish. The drawback of this survey is that it tends to sample older Americans, so it is not capturing the sentiment of the Reddit crowd:

• the latest reading % bulls less % bears came in at -43%
• as indicated, this is rare
• seen only March 2009 and prior to that in 4 weeks Sep to Oct 1990
• only 5 weekly readings are worse than the latest

…Since 1987, S&P 500 bottomed a median 7 days from this reading (3 of 5 within same week)

Take a look at those 5 instances below. This is clearly portentous as a bottom signal in the past:

• stocks bottomed median 7 days
• 3 of 5 within the same week
• win-ratio of stocks next 3M, 6M and 12M
• 100% in each timeframe

Yup, this is a major bottom signal. If one is bearish, this is a strong argument against that.

As for the components of bulls versus bears, we show this breakdown below. The same message comes across. Investors are extremely bearish. And few bulls exist:

• only 16% are bullish
• the lowest since Sept 1992
• wow

Nasdaq 100 underperformance of S&P 500 by -10.7% in past 6M is one of the 10 worst since 1980…

The NASDAQ 100 QQQ-2.08%  is registering one of its worst-ever slumps. While this chart below shows a modest pullback (top chart), the magnitude of underperformance is startling:

• -10.7% past 6M
• this is worse than earlier in the week, when it was -9%
• as we discuss, slumps of this size are often bottom signals

…13 instances where NASDAQ underperforms S&P 500 by -880bp or worse since 1980

A slump of this magnitude is not common. According to our data science team, led by tireless Ken, this has only happened 13 times since 1980.

• these instances are marked below
• the “red dot” marks the first instance where underperformance matched the recent level
• thus, there are instances where the underperformance worsens

…median 22 days for NASDAQ to bottom and beats S&P 500 6M and 12M out

As our clients know, we have been writing extensively about FAANG (FB AMZN-2.56%  AAPL-1.22%  NFLX-9.18%  GOOG-1.30%  NYFANG) recently because we see strong risk/reward after such a long slump:

• FAANG is 25% of the overall S&P 500, so it is a key cornerstone for the market
• if FAANG bottoms, we see a limited market downside
• FAANG has been so bad since November, that we are looking for a proximity of a low

• Data below says the median days to a low is 22 days = good news = before end of May
• Nasdaq 100 outperforms 6M and 12M out with win ratio of 77% and 85%
• Median outperformance is 950bp and 1,260bp, respectively

Hence, we believe the risk/reward in QQQ-2.08%  and NYFANG is strong. As we noted in prior notes, the valuations make many of these stocks value stocks.

FB: Meta-morphosing into a value stock

Meta reported 1Q2022 results on Wednesday and the stock is up strongly and rallying 20%. This is a sigh of relief for markets, given FB sinking has also dragged social media sector lower. While trends beat expectations, growth is slowing.

• so the rally is on bad news
• rallying on bad news is often a sign of a bottom
• FB has 11% FCF yield and trades at 11X P/E = solid value
• we like risk/reward in FAANG broadly

This is something that we have written on extensively.

COVID-19: 58% of Americans now have natural immunity to COVID-19 = pandemic ending

We are providing our weekly update on COVID-19 (see sections below). Trends continue to improve and the BA.2 surge in USA already seems to have petered out. The CDC in the most recently weekly report notes a surprising statistic:

• seroprevalence for Americans is estimated at 58%
• even higher among Children
• this argues strongly for natural immunity
• thus, bolstering the sageness of removing the mask mandate for travel, etc

In other words, for the US, COVID-19 has retreated and largely over as a pandemic. Something most have concluded, but more supporting arguments.

Below is the CDC report, in case one is interested.

...case trends are still positive

There has been a modest uptick in cases in the US, but it is hardly resembling the parabolic surge seen earlier this year. When Omicron first broke out in the US, the transmissibility was so high, that most of the regions saw a parabolic rise in cases and a peak quickly within 30 days. And the spread was so pervasive that this likely was the wave pushing many areas to 58% seroprevalence.

And even NYC seeing the BA.2 surge rollover...

Even NYC did not see much of a surge. The BA.2 surge which began in early March is now rolling over. In fact, the positivity rate is peaking at 5%.

• during Omicron, positivity soared to 33%
• so this wave of BA.2 did not have much traction

STRATEGY: We lean “bullish” into 2Q2022, but warn of jagged next few months… Stick with BEEF
To recap on equity strategy, we are leaning bullish into 2Q2022.

Stocks have continued to be treacherous in 2022. Investors are on a hair trigger.

– this is in context to a challenging 1H2022
– so jagged next 3 months
– but > 88% probability that bottom for 2022 is in

Broadly, our existing sector strategy of BEEF remains valid. Even in war. Even with inflation. In fact, the last few weeks are strengthening the case for our “BEEF” strategy. That is, BEEF is

– Bitcoin + Bitcoin Equities BITO1.04%  GBTC1.04%  BITW1.27%
– Energy
– FAANG FNGS-4.09%  QQQ-2.08%

Combined, it can be shorted to BEEF.

Why is this making stronger BEEF?

– Energy supply is now a sovereign priority
– this helps Energy stocks

– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities

– if Global economy slows, growth stocks lead
– hence, FANG starts to lead FB AAPL-1.22%  AMZN-2.56%  NFLX-9.18%  GOOG-1.30%

All in all, one wants to be Overweight BEEF

POINT 1: Total COVID-19 cases 362,411 over past 7D (avg 51,773 per day), up +83,837 (+11,977 per day) vs same period 7D ago…

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Current Trends — COVID-19 cases (past 7 days vs. 7 days prior):
 – Total new cases  362,411 vs 278,574 7D prior, up +83,837
 – Avg daily cases    51,773 vs 39,796 7D prior, up +11,977
 – 7D positivity rate 7.0% vs 5.7% 7D prior
 – Hospitalized patients  13,495, up +11% vs 7D ago
 – 7D Avg daily deaths 351, down -3.3% vs 7D ago
 _____________________________

The COVID cases are generally higher in all US states on a weekly basis. Over the past 7 days, a total of 362,411 new cases (avg 51,773 per day) were reported in the US, up +83,837 (avg up +11,977 per day) compared to the same period 7 days prior. As shown in the chart below, cases have been on a “rise mode” over the past 3 weeks.

But the recent case rise is hardly comparable to the parabolic surge during the Omicron wave. This is especially positive as the sub-variant BA.2 was considered a “more transmissible and stealthy” version of the original Omicron variant.

The 7D delta in daily cases has been up modestly…
As more states report a higher case figure, the 7D delta in daily cases has also risen.

• But the overall speed of case rise remains stable
• if the speed of increase persists, the average daily new cases could reach 100,000 in 4 weeks
• And even if that’s the case, the level of new cases will still be just a fraction of the peak level we have seen in mid-January.
  

Moreover, the recent rollover in daily cases in NYC (see above) also gives us more confidence. The COVID development in NYC is actually consistent with what happened in Europe in March that BA.2 only caused a mild rise in COVID cases and the case figure soon resumed its decline.

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While more than half of US states are seeing a higher case count on a weekly basis, 18 states have shown clear trends of cases rising.
 *** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), 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

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Net Hospitalization has been flat over the past week. Daily mortality is still falling. The positivity rate is now above 5%…

Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID

– Current hospitalization is still within the range of the all-time low since the pandemic. But it has been ticking up recently. But in terms of absolute numbers of hospitalization, the current level is just a fraction of the peak level at ~160,000 in Mid-January.

– Daily Mortality is still falling. As we learned from the previous wave, the mortality trend tends to have a 3-4 week lag compared to the case trend. So, it is worth watching whether the mortality trend will start to reverse. But it seems the BA.2 sub-variant does not cause severe illness so far.

– As of Money April 4th, HHS is no longer requiring testing sites to report negative antigen test results. Therefore, the number of tests reported is distorted to some degree. We modified our positivity rate calculation slightly and now only included states that report the number of tests (negative and positive, or as a total). Based on the data we could obtain, the trend of the positivity rate is also ticking up. But the current level is still below 10%.

POINT 2: VACCINE: vaccination pace has been up recently…

___________________________
Current Trends — Vaccinations: 
– avg 0.5 million this past week vs 0.5 million last week
– overall, 30.6% received booster doses, 65.9% fully vaccinated, 77.2% 1-dose+ received
_____________________________

Vaccination frontier update –> all states now above 100% 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 above 100% combined penetration 
– 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 649,991 doses administered, as reported on Wednesday. The vaccination pace has started to pick up over the last few weeks.

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

In total, 570 million vaccine doses have been administered across the country. Specifically, 256 million Americans (76% of US population) have received at least 1 dose of the vaccine. 218 million Americans (66% of US population) are fully vaccinated. And 100 million Americans (31% of US population) received their booster shot.

POINT 3: Tracking the seasonality of COVID-19

***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***

As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. 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- Opposite effects hold true in the winter

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.

CASES
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. 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.

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HOSPITALIZATION

DEATHS

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