Course correcting Epicenter --> downgrade Financials to N from OW, upgrade FANG from UW to OW

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We are shifting to a 4-day a week publication schedule:

• Monday
• Tuesday
• Wednesday
• SKIP THURSDAY
• Friday

STRATEGY: Course correcting Epicenter –> downgrade Financials to N from OW, upgrade FANG from UW to OW
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…UK cases bear some watching

The news on COVID-19 remains mostly positive and in part, due to the effectiveness of vaccines.  And so far, even the more transmissible variants can be stopped/slowed by vaccines.  And thus, watching case trends in developed nations, which have far higher vaccine penetration, is a place to watch for trouble:

– UK case trends might be curling up
– the India variant is dominant in UK, and could explain this

– it’s not necessarily a cause for alarm, for us, for two reasons
– UK did recently lift restrictions, so some rise is expected
– Israel has seen cases dwindle to nearly zero, so this gives us comfort

We know many pundits will say US is only a few weeks behind UK, so we should panic.  But this is what many experts said earlier this year, and the UK/Europe had a surge, but no such surge appeared in the US.  So we are not yet alarmed.  But we are watching.

Source: https://coronavirus.data.gov.uk/



STRATEGY: S&P 500 achieves new all-time high both for intraday and closing = big deal = S&P 500 4,400 by mid-2021 intact
The S&P 500 managed to breakout to a new all-time high (ATH) Thursday, both intraday (4,249,74) and closing (4,239.18).  This is indeed a key day.  The core CPI came in strong at 0.7%, way above consensus of 0.5%, and instead of seeing risk assets fall, we saw a strong equity market rally.  As you know, we prefer to see what the market tells us, and it is conveying a positive signal:

– the US 10-yr fell 6bp and now 1.432% –> opposite given CPI
– Nasdaq 100 led gains Thursday +1.0% –> opposite given CPI

By the way, this breakout to new highs was presaged by the upside breakout in the advance/decline line last week (see our prior notes).  The strong rise in the adv/dec line, in our view, is a sign of the equity market getting stronger, and in turn, presaged this upside breakout.  So our base case of a surge in S&P 500 to 4,400 before mid-year 2021 remains intact.

…We believe the leadership to S&P 500 4,400 is now coming from Epicenter + FANGPost-close, the Senate announce bipartisan infrastructure package with NO tax increases, corporate or personal.  While the future is uncertain, this certainly seems to be an equity market friendly outcome:

– infrastructure spend
– no corporate or income tax increases –> benefits Technology/FANG most

This has yet to be approved and our Tom Block, policy strategist, is really going to have a much more informed view.  But to me, I will be watching the bond market reaction to this.  If the 10-yr rates don’t rise (given no tax increase) and USD does not weaken, this tells me financial markets already priced in an infrastructure package with no tax increases.

And as an aside, given many households had large unrealized capital gains Technology/FANG/hypergrowth, the no action on taxes is positive for Technology on the margin, in my opinion.

Source: https://www.cnbc.com/2021/06/10/biden-infrastructure-plan-bipartisan-senate-group-nears-deal.html
STRATEGY: Downgrading Financials to Neutral from Overweight and upgrading FANG from Underweight to OverweightWe are rethinking which sectors will lead the S&P 500 to 4,400 by mid-year 2021 (really next 4 weeks).  The primary reason for this shift in view is that interest rates are declining, and to a secondary extent, reflects the fact markets already “panicked” about inflation.

Because of this, we are taking the following Sector changes:

– downgrade Financials from Overweight to Neutral
– upgrade FANG from Underweight to Overweight

This is a somewhat abrupt change in our view on FANG, since we downgraded FANG in early May.  However, we don’t want to be stubborn.  Nor is the future certain.

But we see higher probabilities that more of the 200 points for S&P 500 rally to 4,400 are likely to come from Technology/FANG than Financials.  And as such, we think this shift is warranted.


…Financials is the sector that most benefits from rising rates, FANG is arguably the most hurtTo understand our rationale for this sector swap, take a look at the matrix below.  We highlight the key macro drivers of 2021:

– Post-war fiscal spend (infrastructure) –> benefits Epicenter
– Household pent-up demand –> benefits Epicenter
– reflationary pressures –> higher rates –> most boost Financials and hurts Tech/FANG (see below)

Thus, if the outlook for interest rates has shifted, and rates are flat/down for the remainder of 2021, then this is a direct headwind for Financials. 

– but this takes away a headwind for FANG/Technology
– FANG/Technology are still overcrowded, but technicals now WAY BETTER

Interest rates, in my view, are seemingly in a downtrend.  Even with Thursday’s super red hot CPI print, yields fell.  

…Technology outperforms Financials when interest rates start to rolloverAnd if interest rates are rolling over, this is generally a tactical signal to sell Financials vs Technology/FANG.  Take a look at the chart below:

– whenever 6M change in interest rates is going down, Technology beats Financials
– whenever 6M change in rates is higher, Financials beat Technology –> case for past 6 months

Thus, the rollover in interest rates is emerging as a case for FANG to lead.

…Only half of Financial industry groups look healthy…
And within the GICS 4 of Financials, only 4 of the 9 groups look healthy.  The healthy groups:

– Investment banks
– Insurance
– Consumer Finance

So banks look questionable.  Asset managers look weak.  And thus, the group seems to be seeing narrowing strength.

…Financials DeMark outlook has decisively worsened, after seeing a ‘perfect 13’ sell signal in May
The technical picture for Financials is also worsening.  We like to use DeMark system to provide a technical context.  And the key is watching how a sector/group reacts to a ’13’ combo signal.

– Financials (XLF ETF) had a perfected ’13’ sell signal in late May
– Financials previously had two prior ’13’ sell signals but financials rose, meaning failed signals
– Since May, Financials have weakened and now seem in a confirmed downturn

This corresponds with the more decisive downtrend in interest rates.  Thus, the technical picture seems to confirm that the trend in interest rates is flat/lower.

…FANG technical picture is strengthening and suggest reversal of downtrend is confirmed
Conversely, look at the Demark combo count for FANG (NYFANG Index) and we can see that FANG is showing strength:

– a ‘9’ sell signal was generated late May
– but instead of weakening, FANG has powered higher
– this is similar to the failed buy ‘9’ in Feb, and its failure led to further selling

– this time, failed ‘sell signal’ points to strength ahead

This seems to me that much of the bad news for FANG has been baked in.  Whether tax hits, or regulation, or inflation wallops, etc.  These are not causing FANG to fall.  And thus, we see leadership emerging.

BOTTOM LINE: Course correction –> FANG will be key to S&P 500 4,400, moreso than FinancialsBottom line, we remain positive on equities. We are course correcting to recognize FANG is likely more important than Financials.  But we are more constructive on Energy versus FANG.  Thus, we favor Energy as top sector idea.

TACTICAL:
– IWM set for a tactical 10 day rally, back to $235-$240 possibly
– IWM needs a few more days, like 5-10 days

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), Technicals
– Violence in USA –> companies that are involved in some aspect of home or personal security. We are not “recommending” these stocks, but rather, bringing these stocks to your attention.

Granny Shots:
Full stock list here –> Click here

Trifecta Epicenter (*):
Full stock list here –> Click here

Power Epicenter Trifecta 35 (*):
Full stock list here –> Click here

Violence in USA:
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 COVID-19 cases 12,387, -3,934 vs 7D ago… Could have a clear view on case trend next week.
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Current Trends — COVID-19 cases: 
– Daily cases   12,387 vs 16,321 7D ago, down -3,934
– 7D positivity rate   2.0% vs 2.0% 7D ago
– Hospitalized patients   16,595 down -13.3% vs 7D ago
– Daily deaths    360,  down 10.2% vs 7D ago
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– The latest COVID-19 daily cases came in at 12,387, down -3,934 vs 7D ago. Considering the additional 1,500 cases that FL is likely to report (we switched to use CDC cases for FL which is subject to one to two-day lag), the 7D delta in daily cases could reduce to approximately -2,500. The decline in daily cases has been slowed over the past few days, but we have not seen the case to surge following the Memorial Day holiday. The data distortion resulted from the holiday will still last a few more days and we could have a clear view on the case trend next week.

7D delta in daily cases has turned negative after the spike on Monday….
The 7D delta in daily cases has turned negative again following Monday’s spike. Although the decline in daily cases seems to slow down, the daily cases remain on a downtrend and we haven’t seen the case figure to surge yet. As we noted previously, the data distortion could cause the 7D delta to fluctuate in the next few days, but we still expect the steady decline in daily cases to persist after the data distortion fades out.
  
 

Current hospitalization, daily deaths and positivity rate are at all time low…
Below we show the aggregate patients who are currently hospitalized due to COVID. After a mini-surge in March, the number of patients currently hospitalized rolls over again. Positivity rate is also following the similar pattern. Currently, all three metrics – current hospitalization, daily deaths and positivity rate – are at their all time lows since the start of the pandemic.

POINT 2: VACCINE: Vaccination progress has stalled – the average daily number of dose administered fell to 1.1 million…
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Current Trends — Vaccinations: 
– avg 1.1 million this past week vs 1.0 million last week
– overall, 42.4% fully vaccinated, 51.5% 1-dose+ received
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Vaccination frontier update –> all states now near or above 70% combined penetration (vaccines + infections)
Below we sorted the states by the combined penetration (vaccinations + infections).  As we commented in the past, the key figure is the combined value >60%, which is presumably near herd immunity. We have overlaid our case progress with that of Israel several times to demonstrate what should happen to cases once immunity reaches a certain critical level in the population.  That is, the combined value of infections + vaccinations as % population > 60%. The persistent and rapid decline in cases suggest that the US is following a similar path to Israel (see our prior notes) while nations with less penetration continue to struggle more. 

– Currently, all states are near or above 70% combined penetration
– RI, SD, MA, ND, CT, NJ, DE, NY, IL, UT, MN, NM, NE, AZ, PA are now above 90% combined penetration (vaccines + infections)
– So gradually, the US is getting to that threshold of presumable herd immunity. So long as a vaccine resistant variant doesn’t spread widely, the continued retreat of cases should continue. 

Below is a diffusion chart that shows the % of US states (based on state population) that have reached the combined penetration >60%/70%/80%/90%. As you can see, all states have reached 60% and 70% combined vaccination + infection. 78.0% of US states (based on state population) have seen combined infection & vaccination >80% and 52.3% of US states have seen combined infection & vaccination >90%.  

There were a total of 927,357 doses administered on Thursday, up 16% from 7D ago. The increase in doses administered could be the result of under-reporting in the Memorial Day week. But, if you look at the chart below closely, the vaccination trend (dashed line: 7D average) seems to be reversing higher. This is good news – with continued efforts for a higher penetration of vaccines, it could prevent the renewed outbreak and ensure the economy to safely reopen.



 

93.4% of the US has seen 1-dose penetration >40%… 
To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 35%/40%/45% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, 87.2% of US states have seen 35% of their residents fully vaccinated.   However, when looking at the percentage of the US with at least 40% of its residents fully vaccinated, this figure is 62.7%. And only 44.5% of US (by state population) have seen 45% of its residents fully vaccinated.

– While 93.4% of US states have seen vaccine penetration >40%, 78.7% of them have seen 1 dose penetration >45% and 55.7% of them have seen 1 dose penetration > 50%.
– 87.2% of the US has at least 35% of its residents fully vaccinated, However, only 62.7% of US has fully vaccinated >40% and 44.5% of US has fully vaccinated >45%.

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

The ratio of vaccinations/ daily confirmed cases is generally trending higher (red line is 7D moving avg), but this is largely due to the decline in daily cases.


– the 7D moving average is about ~70 for the past few days
– this means 70 vaccines dosed for every 1 confirmed case

In total, over 300 million vaccine doses have been administered across the country. Specifically, 171 million Americans (52% of US population) have received at least 1 dose of the vaccine. And 141 million Americans (42% of US population) are fully vaccinated.

POINT 3: Tracking restrictions lifting and subsequent effects in individual states

Point #3 focuses primarily on tracking the lifting of restrictions, as states have eased the majority of mandates.  Keep in mind, easing/lifting restrictions are contingent upon state of emergency ordinances being renewed. 

– States in groups 1 and 2 represent states that let their emergency ordinances expire, or that never had one in the first place
– Note: IL and HI are not listed. This is because restrictions lifting is determined at the county / island level, and no statewide policy will be established to lift restrictions until a full reopening

So there is a spectrum of approaches.  Our team is listing 3 tiers of states and these are shown below.  

– states that eased all restrictions in 2020: AK, OK, MO, FL, TN
– states that have eased all restrictions in 2021 to now: ND, SD, NE, ID, IA, MT, MS, AZ, SC, WY, TX, GA, AR, KS, WI, IN, AL, UT, NH
– states that are still easing restrictions in 2021: OR, ME, WV, WA, MN, MA, NC, KY, LA, CA, DE, PA, NM, OH, CO, NJ, VT, MD, NV, NY, CT, VA, MI, RI, DC

GROUP 1:  States that lifted restrictions in 2020…
The daily case trends in these states are impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases because the case trends in these states look like other states.

GROUP 2: States that have lifted restrictions in 2021 to now…
Similar to the list of states above, the daily case trends in these states are impressive and it seems that lifting restrictions hasn’t caused an increase in cases.  

GROUP 3: States that are still easing restrictions in 2021…
These states have begun to lift restrictions, but have yet to ease all restrictions.  The date of each state’s most recent restrictions lifting is indicated on each chart.  The case trends in these states have been mostly positive.

– Easing restrictions appears to have contributed to an increase in cases in several of these states, most drastically in OR, ME, WA, and MN