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STRATEGY: Two 90% down days are a sign of a bottom, not a top

Market absolutely horrific —> but two 90% down days = capitulation
Equities have been in a tailspin since last week, spurred by the fears of the Omicron variant, and Tuesday the downside driver was Fed Chair Powell testimony, where he essentially capitulated on the notion of “transitory” inflation. I realize the future is uncertain, however, we believe the market reaction over the past two days has been disproportionate to the change in the actual outlook for markets. Here are the reasons we believe this:

– We are at month end, which means = window dressing
– Fed Chair Powell removed “transitory” from his commentary, simply to “get the monkey off his back”
– Omicron remains an uncertain risk, but every variant of COVID-19 has burned itself out = more virulent = faster the burnout
– Signs of capitulation, since we had two 90% down days in sequence

I have been puzzled by the fierce market reaction to two recent developments:

– panic over Omicron variant
– panic over Powell testimony
– reflecting both “faster taper”
– reflecting removal of “transitory” inflation

As many are aware, equity markets saw fierce selling on Tuesday. Tuesday was the last day of the month, so “window dressing” and position squaring were factors.

And for those concerned about YE dynamics, the natural question is whether the selling in the last two days is a sign of a top or a bottom.

– we have the S&P 500 since 2020 below
– we have highlighted the instances of two 90% down days within 5 trading days
– notice something?

– two 90% down days are a sign of a bottom
– literally this is a textbook bottom, and a sign of capitulation

In other words, the panic selling due to Omicron and Powell have created sufficient selling to establish a tradable low.

– don’t believe it
– look at the chart below
– it is literally the market low each time

Two 90% down days are a sign of a bottom, not a top

VIX did not surge to a new high, despite equities tumbling on Tuesday
Similarly, take a look at the VIX. Despite a trouncing taking place in equities, the VIX did not make a new high

– in fact, as shown below, the VIX surged to a high on Friday
– but the carnage on Tuesday did not bring in a surge of investors seeking protection
– in other words, the derivatives markets diverged from the market carnage

Two 90% down days are a sign of a bottom, not a top


Fed potentially discusses accelerated taper, but inflation breakevens fall
Here is another divergence. Fed inflation breakevens fell on Tuesday. And have been falling since mid-Nov. If inflation risks are no longer transitory but structural, these inflation breakevens should be strengthening:

– this is another divergence
– the Fed and the bond market have been in a battle around inflation
– if Fed is giving up the “transitory” view
– inflation breakevens, in our view, should be strengthening
– otherwise, why would inflation risks be falling, on the heels of a Fed capitulation
– hence, we think markets are seeing diminished risk of inflation
– thus, lower inflation risk should be viewed as a positive for equities

Two 90% down days are a sign of a bottom, not a top

…Fed odds of a July hike have fallen = delayed lift-off = positive for equities
Similarly, if the Fed is shifting its inflation view, towards one where inflation risks are no longer transitory, then one should expect the risks of Fed lift-off to be rising

– instead, the odds of Fed lift-off in May should be rising
– taper accelerating = lift-off sooner
– however, the Fed odds of May lift-off, as shown below
– have fallen since early October

Two 90% down days are a sign of a bottom, not a top

Bottom line: we don’t want to shout at the market, but the sell-off in equities on Tuesday simply does not make sense to us
We don’t want to be shouting at the market, but in our view, equities sold off on what we believe are transitory factors:

– stocks sold off for
– fears of omicron
– fears of Fed moving up taper
– fears of inflation
– fears of poor visibility

but we think markets are ultimately reacting to poor market visibility. Hence, we expect markets to be weak, reflecting this uncertainty. But these strike us as glancing blow against this strengthening economic recovery.

– hence, we see equities still rallying into YE
– but this could be from a lower level

Two 90% down days are a sign of a bottom, not a top

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.

Two 90% down days are a sign of a bottom, not a top

Into YE, our recommended strategies are:

– Energy
– Homebuilders (Golden 6 months):  XHB
– Small-caps:  IWM 0.79%
– Epicenter:  XLI -0.09%   XLF 0.21%   XLB 0.15%   RCD
– Crypto equities:  BITO 4.24%   GBTC 3.94%   BITW 1.50%

Into 2022…
– Industrials

Two 90% down days are a sign of a bottom, not a top

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


POINT 1: Daily COVID-19 cases 98,077, up +10,116 vs 7D ago…

Current Trends — COVID-19 cases:

  • Daily cases 98,077 vs 87,961 7D ago, up +10,116
  • Daily cases ex-FL&NE 94,513 vs 84,491 7D ago, up +10,022
  • 7D positivity rate 10.7% vs 7.6% 7D ago
  • Hospitalized patients 50,682, up +4.2% vs 7D ago
  • Daily deaths 865, down -21.7% 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 98,077, up +10,116 vs 7D ago. The data is currently distorted from underreporting due to Thanksgiving. The distortion will likely remain for the next week or two.

Nonetheless, 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.

Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top

Rolling 7D delta to distorted due to Thanksgiving…
The rolling 7D delta is currently distorted due to Thanksgiving. We’ll continue to monitor the data closely.

Two 90% down days are a sign of a bottom, not a top


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
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top

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

Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top

POINT 2: VACCINE: vaccination pace accelerates as boosters become more widely available…

***The CDC didn’t reported vaccination data from Wednesday, 11/24 to Monday, 11/29 due to Thanksgiving. As such the data is currently distorted.

Current Trends — Vaccinations:

  • avg 1.1 million this past week vs 1.3 million last week
  • overall, 58.9% fully vaccinated, 69.6% 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

Two 90% down days are a sign of a bottom, not a top

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%/100%. As you can see, all states have reached combined infection & vaccination > 100% (Reminder: 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 the state is either infected or vaccinated).

Two 90% down days are a sign of a bottom, not a top

There were a total of 1,537,694 doses administered reported on Tuesday, vs. 42,896 7D ago. As per the note above, the low number of vaccines administered 7D throughout the past week is due to Thanksgiving. This distortion aside, we’ve been seeing the vaccination pace accelerate as booster shots are becoming more widely available. 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.

Two 90% down days are a sign of a bottom, not a top

81.7% of the US has seen 1-dose penetration > 60%…
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 45%/45%/50% of its residents fully vaccinated, displayed as the orange lines on the chart. Currently, 100% of US states have seen 40% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 45% of its residents fully vaccinated, this figure is 99.5%. And only 88.5% of US (by state population) have seen 50% of its residents fully vaccinated.

We have done similarly for residents with at least 1-dose of the vaccination, denoted by the purple lines on the chart. While 100% of US states have seen 1 dose penetration > 50%, 97.8% of them have seen 1 dose penetration > 55% and 81.7% of them have seen 1 dose penetration > 60%.

Two 90% down days are a sign of a bottom, not a top

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

Two 90% down days are a sign of a bottom, not a top

The ratio of vaccinations/ daily confirmed cases has been falling significantly (red line is 7D moving avg). Both the surge in daily cases and decrease in daily vaccines administered contributed to this.

– the 7D moving average is about ~20 for the past few days
– this means 20 vaccines dosed for every 1 confirmed case

Two 90% down days are a sign of a bottom, not a top

In total, 427 million vaccine doses have been administered across the country. Specifically, 231 million Americans (70% of US population) have received at least 1 dose of the vaccine. And 196 million Americans (60% of US population) are fully vaccinated.

Two 90% down days are a sign of a bottom, not a top

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.

Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top

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.

Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top

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.

Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top
Two 90% down days are a sign of a bottom, not a top

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