S&P 500 internals getting stronger --> tracking new highs before month end, led by Energy + Epicenter

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

• Monday
• Tuesday
• Wednesday
• SKIP THURSDAY
• Friday

STRATEGY: S&P 500 internals getting stronger –> tracking new highs before month end, led by Energy + Epicenter
It is increasingly obvious that going forward, the relative freedom of a nation’s economy will follow the path of vaccine penetration. That is, nations with higher vaccine penetration are less likely to introduce disruptive lockdowns (stemming from flare ups of COVID-19) and presumably, these “freer” nations should have better economic visibility.

Compare these headlines:

– Guangzhou tightens COVID-19 controls and upgrades risk levels (more dangerous)
– Israel reports ZERO COVID-19 cases

China’s economic recovery is strong and the above episode does not really risk this. However, those nations that managed COVID-19 primarily via lockdowns –> Taiwan, Hong Kong, Japan, Australia, etc., are going to be grappling with periodic outbreaks. Moreover, given the transmissible variants leaking from India, we expect this “stop and halt” jerkiness to continue throughout the remainder of 2021.

Sources:
https://www.scmp.com/news/china/article/3136260/guangzhou-tightens-covid-19-controls-mass-tests-expose-more-cases
https://www.jpost.com/breaking-news/coronavirus-in-israel-4-new-cases-01-percent-of-tests-return-positive-670234

It is utterly remarkable to see the dramatic turnaround in Israel. That nation has battled COVID-19, and suffered in part from non-compliance from many cohorts within the nation. Yet, Israel has reported ZERO local new cases. In fact, look at active cases:

– active cases total 230
– it was 88,000 in the winter
– this is an eye-popping drop

https://www.jpost.com/breaking-news/coronavirus-in-israel-4-new-cases-01-percent-of-tests-return-positive-670234

…US companies may require new hires to be COVID-19 vaccinated
United Airlines said it will require new hires to be fully COVID-19 vaccinated, as reported by CNBC. This is obviously a controversial move, given Americans are not required to be vaccinated, citing multiple reasons including vaccine hesitancy and general distrust of vaccines:

– companies with front-line facing employees, requiring new hires to be vaccinated is arguably protecting public safety
– many universities are requiring returning students to be vaccinated
– whether this becomes the stance of the plurality of major corporations is still unknown

Source: https://www.cnbc.com/2021/06/05/united-will-require-new-employees-to-show-proof-of-covid-vaccine-following-delta.html?__source=iosappshare%7Ccom.slack.slackmdm.share

STRATEGY: Advance/decline line made a new “all time high” = S&P 500 set to make new all-time high
10 days ago, the S&P 500 cumulative advance/decline line (cum a/d) was marching higher and looked set to make a new high. At that time, we wrote of the significance of this. When internals aka breadth make new highs, this is a sign of an equity market strengthening and new index highs generally soon follow:

– This past week, the cum. A/D line decisively broke out to new highs (see below).
– Since that breakout, A/D has marched higher
– Market internals strengthening, as equity rally is broadening
– New Index highs, in our view, are just a matter of time

The strength of the cum a/d line reinforces our view that S&P 500 can make new highs, reaching 4,400 before mid-year. This is about 5% upside for June.

…leadership in past few weeks is Epicenter, led by Energy and Tech is stable, but not leading
Naturally, the question is what will lead markets higher. Take a look at the sector leadership since May 7th. We picked May 7th because this was the previous S&P 500 high (4,238):

– since 5/7, two sectors had produced meaningful outperformance
– Energy (XLE-0.22% ) and Financials (XLF-0.95% )
– Technology has been tracking the overall index — our Neutral remains appropriate
– If the above are correct, the next 200 S&P 500 points is being led by commodity-sensitives (financials fall into this bucket)

Thus, we see the leadership and driver of the next +5% for S&P 500 coming from Energy and Financials and Epicenter groups broadly. Technology seems to be stabilizing.

…Energy is up 45% YTD and gains are strengthening
The outperformance of Energy recently is not a fluke. Take a look below at the sector YTD returns.

– Energy is up +45%, trouncing any other sector
– Financials is just behind +30%
– Technology and Healthcare, last year’s darlings, are up +7%, trailing both Energy, Financials and also S&P500

…Energy leadership is accelerating in June while Growth laggardship is worsening
Take a look at the monthly sector returns for major S&P 500 groups (GICS 1). 2021 remains a year of Epicenter:

– Energy is +45%, trouncing any sector
– Energy leadership is accelerating in June
– Energy +6.7% in June vs +0.6% S&P 500
– Growth underperforming is worsening

The outlook for Energy is stronger today than it was in January. There is greater visibility on several fronts:

– price of oil has steadily risen
– Energy companies are returning capital to shareholders
– Capex has been muted, contributing to an improving supply/demand outlook

Overall, we see Energy leadership strengthening throughout 2021. And we could easily see this sector see 100%-plus returns in 2021

BOTTOM LINE: We remain positive on equities, and see signs of capitulation. Our top 3 sectors remain:

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

OVERWEIGHT “Positive Surprise”
– Top 3 sectors still Energy, Materials and Financials –> XLE-0.22%  XLB0.01%  XLF-0.95%

UNDERWEIGHT “Falling on a Slope of Hope”
– Cautious on Technology and recommend using strength to reduce –> XLK-1.44%  QQQ-1.48%

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 5,992, -3,201 vs 7D ago… as COVID situation improves, over half of US states decide to not report over the weekend…
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Current Trends — COVID-19 cases:
– Daily cases 5,992 vs 9,193 7D ago, down -3,201
– 7D positivity rate 1.9% vs 2.3% 7D ago
– Hospitalized patients 17,830 down -14.4% vs 7D ago
– Daily deaths 393, down 17.2% vs 7D ago
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– The latest COVID-19 daily cases came in at 5,992, down -3,201 vs 7D ago. With the improved COVID situation across the country, over half of the US states now decided to skip the weekend and only report COVID stats on the weekdays. That said, the decline in daily case figures is not due to the change of reporting schedule, but really endogenous as a result of the high penetration of vaccines. Currently, all COVID metrics – daily cases, daily deaths, current hospitalization, and positivity rate – are at their all time low since the start of the pandemic. In fact, the positivity rate now breaks below 2%. Recall, the positivity rate reached as high as 15% at the start of this year.

– The 7D delta chart below shows the steady trend of decline in daily cases. Because of the under-reporting last Monday (Memorial Day), we expect the 7D delta will jump on Monday (6/7). However, this will not change the case trend and the steady decline in daily cases will persist.

7D delta in daily cases has turned negative in the past 8 weeks…
The 7D delta chart below shows the steady trend of decline in daily cases. Because of the under-reporting last Monday (Memorial Day), we expect the 7D delta will jump on Monday (6/7). However, we believe the steady decline in daily cases will persist.

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 has fallen below 1 million over the past 7 days…
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Current Trends — Vaccinations:
– avg 0.9 million this past week vs 1.3 million last week
– overall, 41.6% fully vaccinated, 51.1% 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. Several times, we have overlaid our case progress with that of Israel 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 reach the combined penetration >60%/70%/80%/90%. As you can see, all states have reached 60% and 70% combined vaccination + infection. 76.5% of US states (based on state population) have seen combined infection & vaccination >80% and 51.9% of US states have seen combined infection & vaccination >90%.

There were a total of 1,097,914 doses administered on Sunday, down 10% compared to 7D ago. As we noted last week, the vaccination progress has stalled – the average number of doses administered has now fallen below 1 million. And the vaccination hesitancy following the pause of JNJ vaccine could be one of the biggest factors. Looking ahead, in order to achieve the goal of Biden Administration that to have 70% of the US population receive at lease one dose vaccines by Independence Day requires about 2 million doses administered per day at minimum. Based on the current speed of vaccination, this goal will be difficult to reach.

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, 83.2% 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 62.4%. And only 27.5% 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 54.8% of them have seen 1 dose penetration > 50%.
– 83.2% of the US has at least 35% of its residents fully vaccinated, However, only 62.4% of US has fully vaccinated >40% and 27.5% of US has fully vaccinated >45%.

This is the state by state data below, showing information for states with one dose and for those with 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 half of Americans have received at least 1 dose of a vaccine. But given recent pace of vaccination, it might be difficult to achieve the goal of 70% of population received at least one dose vaccines by Independence Day.

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.

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.