VIX sure seems less concerned about Washington than betting markets -- is this clue that "buyers strike" might end sooner?

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STRATEGY: Equity markets suffer a “buyer’s strike” given deadline on Washington debt ceiling

Made in DC Crisis (per Tom Block)
There were many negative headlines buffeting markets, but the most meaningful, in our view, is the looming debt ceiling as the US federal government would run out of funds by October 18th if action is not taken.  Washington is at an impasse, not surprisingly, as neither party is yet taking sufficient incremental steps to stave this off. 

– look at this quote from President Biden from yesterday
– “a meteor is headed to crash into our economy”

That is dire.

Tom Block, Head of Policy Strategy, calls this a classic example of a “Made in DC crisis” — Washington has many procedures for getting this particular solution passed, but as we know, the solutions favored by Democrats are not the same as those for Republicans.  But as Tom Block hints, we have seen this same storyline in past instances. 

– timing of resolution is not known per Tom Block
– “the pending crisis will likely be down to the wire on October 18”

…Betting markets are also implying this will come down to the “wire”
Nobody wants this to come down to the wire.  The stakes are obviously too great and failure to raise the debt ceiling, prior to deadline, and actually defaulting on debt would be a catastrophe.  So, markets are naturally worried, and unfortunately, this is the ways of Washington.  

– the betting markets are not optimistic at the moment
– Predictit.com has only an implied 37% probability that debt limit is raised before October 15th

– “drop dead” date is 10/18, not 10/15
– so this market is not saying the US will not raise the ceiling on time

– it is saying that markets do not think there will be much of a “cushion”

STRATEGY: “buyers strike” causes S&P 500 suffering but Technicals could improve by the middle of this week
The impasse in Washington is contributing to a “buyer’s strike” in equity markets.  That is, investors are reducing their exposure to equities because of the looming deadline around the debt ceiling.  As shown below:

– Monday’s trading session pushed the S&P 500 below its Friday’s low
– and sitting just underneath the 100D moving average

– VIX is not pushing to new highs
– US 10-year has been stable

Thus, while equities are falling and falling hard, there does seem to be a curious divergence.  After all, if derivatives markets were worried about a default on US debt, we would think that VIX curve should be inverting.  In other words, if other asset markets were “freaking out” about debt ceiling:

– VIX term structure should be inverted
– Spot VIX should be getting >30
– US 10-yr yields should be falling (safety trade)

So, this could mean it will get worse before it gets better — that is, if the VIX starts getting jumpier.  Or US yields fall.  But if they don’t, we have a curious divergence.

…VIX sure seems less concerned about Washington — is this a clue that the “buyers strike” might end sooner?
As many of our clients know, we often look to the VIX to give us a sense for how much incremental danger lurks out there. That is, when the VIX spikes and when the VIX term structure inverts, we know markets are bracing for large near-term volatile events. And in the case of the debt ceiling risk, this should be the case:

– Debt ceiling is breached 10/18, or within this month

– if risk of breaching is elevated, VIX futures markets should expect 1M VIX to exceed 4M VIX
– in other words, VIX term structure should be inverted currently

Take a look below, the VIX term structure inverted intraday on 9/20 (two weeks ago) but has not revisited an inversion since.  This is very curious and makes us think stocks might be over-reacting:

– VIX term structure is not inverted
– VIX spot has not managed to exceed the 28 in late Sept
– VIX spot has not exceeded VIX highs of last week

For now, we would encourage everyone to keep their eyes on this.  If this condition remains in place, the “buyers strike” for stocks might end sooner than we expect.

…Our Head of Technical Strategy believes that the dip is buyable mid to late this week
In fact, our Technical Strategy team, led by Mark Newton, believes that stocks might find their bottom by mid-to-late this week.  He is seeing multiple signs of exhaustion to the downside.  

– and the S&P 500 is nearing its near-term target of 4,226 to 4,244 levels
– this would be a Fibonacci retracement (61.8%) and a key technical level
– FYI, he likes Energy as well

Equity markets can still advance without Growth leadership — global inflows into US equities offsets this
There are many with concerns about the broader S&P 500 index because of the potential of faltering leadership of Growth stocks.  There is rationale for this, given that Growth/Defensives account for ~70% of S&P 500’s market cap:

– if Growth falters
– 70% of the index is under pressure

But a key distinction is that investors are assuming that the pool of buyers of US equities are simply shifting sectors within the S&P 500:

– if interest rates rise, we think allocations to bonds will decrease = rotate into US stocks
– if interest rates rise, global investors will allocate towards USA = rotate into US stocks
– many Growth stocks are positively leveraged to higher rates = Growth doesn’t have to sink

In fact, take a look below.  This chart is the relative performance of the S&P 500 vs MSCI All-world index since February.  And as shown, the US index has managed to increase its relative performance versus global markets:

– S&P 500 outperforming global stocks
– FANG has been underperforming global markets by 900bp in that same timeframe
– S&P 500 has managed to grow its lead, while losing the engine of FAANG

So this should hopefully provide some perspective on why a faltering/losing Growth leadership doesn’t mean S&P 500 has to fall.

…But Growth stocks in the S&P 500 are underperforming badly in the past month
The last two weeks we have seen a vicious underperformance of Growth sectors within the S&P 500 as shown below.  The most notable underperformance has been Healthcare and Technology.  There are multiple reasons for this, but perhaps the most prominent macro factor has been the rise of interest

…Epicenter stocks continue to strengthen, suggesting economic resilience remains intact
And look at the leadership by Epicenter sectors (aka Cyclicals).  In the past month, these groups have handily outperformed the S&P 500.  The three strongest groups:

– Energy
– Financials
– Consumer Discretionary

These groups should not be leading if the debt ceiling debacle were to cause catastrophic consequences for the economy.  Rather, we think the outperformance here is important — during a period of market turmoil, Epicenter stocks are showing relative strength:

– these 3 sectors are enabling the S&P 500 to advance
– offsetting the drag from Growth sectors

JPMorgan Credit Card is pointing to strengthening of Travel spending = pent-up demand 
In fact, JPMorgan’s Chase Credit Card spending data is showing a nice uptick in demand.  This coincides with the retreating of the Delta-variant surge.  

– but it is most importantly a reminder that markets sometime become short-sighted
– investors fretted when credit card data rolled over last month

– many viewed this as “peak everything”
– Delta impairing expansion

– but it looks like a temporary blip and positive trend resuming

BOTTOM LINE: Stocks are struggling but underneath the surface, things seem incrementally better
Equities continue to suffer and have been generally ping-ponging around for the past 4 weeks.  That said, we think a lot of bad news might be getting priced in/ already-priced in.  This is tricky because “buyers strikes” also limit market liquidity.  But our base case remain that equities are still positive risk/reward.  And we like Epicenter, with Energy as our top pick.

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26 Granny Shot Ideas:
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POINT 1: Daily COVID-19 cases 170,098, down -28,130 vs 7D ago…
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Current Trends — COVID-19 cases: 
– Daily cases   170,098 vs 198,228 7D ago, down -28,130
– Daily cases ex-FL&NE   167,357 vs 193,946 7D ago, down -26,589
– 7D positivity rate  6.0% vs 6.7% 7D ago
– Hospitalized patients   64,829, down -13.7% vs 7D ago
– Daily deaths  1,880,   down -6.3% vs 7D ago
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*** 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 170,098, down -28,130 vs 7D ago. As indicated by the consistently negative 7D deltas, cases are currently rolling over. At the individual state level, we’ve recently been at the critical stage of case rollover as more states begin to turn. We will continue to monitor all relevant data closely, but as long as 7D deltas remain negative, case rollover will continue. 

Rolling 7D delta in daily cases remains negative…
As shown in the chart below, the rolling 7D delta in daily cases remains negative. The negative rolling 7D delta further emphasizes the case roll over.

Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
The “Parabolic Case Surge Tracker” monitors the possible parabolic surge in daily case figures. In the table, we included both the vaccine penetration and the recent case trend for 50 US states + DC. The table is sorted by the multiple of their recent peak daily cases divided by the daily cases when their case surges started.

– The states with higher ranks are the states that have seen a more significant rise in daily cases
– We also calculated the number of days during the recent case surge; a state with a high multiple but low number of days since its low means the state is facing a relatively rapid surge in daily cases
– The US as a whole, UK, and Israel are also shown at the top as a reference

Hospitalization continues rising, while positivity rate has plateaued… Daily deaths also start to surge now…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Hospitalization has exceeded the peak level we’ve seen in Wave 1 and 2 in 2020 and continues surging.
– With the increasing number of daily tests, positivity rate has plateaued over the past week. As daily cases have already start to roll over in some states, the positivity rate could roll over soon.
– Daily deaths have been surging recently, but less “dramatic” than the cases or hospitalization trends. Currently, daily death has surpassed the peak we have seen in Wave 2.

POINT 2: VACCINE: vaccination pace trending up once again…
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Current Trends — Vaccinations: 
– avg 0.9 million this past week vs 0.6 million last week
– overall, 55.5% fully vaccinated, 64.3% 1-dose+ received
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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 80% combined penetration
– Given the new multiplier. only RI, FL, MA, CT, NM, NY, NJ, IL, CA, PA, and DE 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.

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 90% combined vaccination + infection. 90.0% of US states (based on state population) have seen 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).

There were a total of 984,566 doses administered reported on Sunday, up 81% vs. 7D ago. We are once again seeing the vaccination pace pick up 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.

57.1% 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 96.1%. And only 81.6% 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 98.7% of US states have seen 1 dose penetration >50%, 87.1% of them have seen 1 dose penetration >55% and 61.1% of them have seen 1 dose penetration > 60%.

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 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 ~10 for the past few days
– this means 5 vaccines dosed for every 1 confirmed case

In total, 397 million vaccine doses have been administered across the country. Specifically, 213 million Americans (65% of US population) have received at least 1 dose of the vaccine. And 184 million Americans (56% 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.