Click HERE to access the FSInsight COVID-19 Daily Chartbook.
Financial markets, in my view, are heavily linked to macro trends, particularly the path of COVID-19. While many people might disagree, a simple way to test is whether a rotation into “cyclical” and “epicenter” stocks will take place once we get conclusive improvements in trend. FYI, we will be following a shortened publication schedule this week:
– Monday morning
– Tuesday morning
– Wednesday morning
– Thursday morning (9/3)
Labor Day holiday –> no reports Friday and Monday
– Tuesday morning (9/8)
STRATEGY: Epicenter stocks barely “budged” last week…
The most interesting development over the past week is the market’s “rethink” around cases:
– first, we are seeing cases rise due to “back to school,” particularly large outbreaks at colleges
– second, the NY Times had a story over the weekend about how PCR tests might be overly sensitive and 90% of “positive” tests barely had virus
– third, US deaths are falling
And if this is true, that markets and Americans are beginning to look “past cases,” we are in a situation similar to April and May. If we look at the chart below, that was a period of explosive outperformance of epicenter stocks vs FANG. For epicenter, we are using the ETF SPHB.
– as shown below, there was an extended multiweek rally in epicenter during May
– the rally in epicenter last week barely registers
This is the latest list (*) of epicenter stocks, as compiled by our data science team, led by tireless Ken.
– 43 epicenter stocks, also ranked highly by our Global Strategist, Brian Rauscher, and Technical Strategy, Rob Sluymer
– 14 travel-related stocks
These stocks should lead, if markets are macro-driven, and believe a US economic recovery is underway.
POINT 1: Case improvements stalled for past few days, but F-CAT collapsing
As we commented last week, daily COVID-19 case improvements stalled in the past few days. This is notably due to the surge in cases across many college campuses. While the first instinct for many is the “shut down” the campuses. Here is a question:
– In June, when cases surged in several states, was the right solution to “shut down” the state?
In retrospect, while such drastic measures would have contained the virus, it would have caused enormous damage to the state economy. Similarly, we think colleges need to address these surging cases, but a “shut the campus” seems hardly the ideal solution.
– below, we can see daily cases Sunday were 37,762, which is about flat vs 7D ago.
Source: COVID-19 Tracking Project
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average. The last few days have seen daily cases flat/up vs 7D ago. This is a stalling of the trend, which was showing sustained improvements a few weeks ago.
Source: COVID-19 Tracking and Fundstrat
But to blame colleges might also be overly sweeping. As you can see below, the 4 epicenter states, FL, CA, AZ, TX, or F-CAT, have seen cases still collapsing. There are many colleges within these states.
– F-CAT saw such a dramatic surge in cases, that these 4 states might have reached a level of prevalence akin to “herd immunity”
– instead, cases are surging in the “red line” which are the states with low case prevalence already.
Source: COVID-19 Tracking Project
Look at Arizona, daily cases are 92% off their highs — wow.
Source: COVID-19 Tracking Project
And the positivity rate in the US is still drifting lower, another good sign. It has remained below 10% and even as daily cases are stalling vs 7D ago, the positivity rate seems to be drifting lower = good.
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat
POINT 2: 44%, +4% since Thursday, of the US counties (based on Pops) has cases 75% off its highs…
The number of US counties with cases 75% of its highs blasted to a new high over the weekend. As shown below, this last peaked in early June. And we know that when this line began to roll over, the trends in COVID-19 were worsening.
– this figure now stands at 44% but it reached >55% over the weekend
– this is based upon county-level data so it gives us a clearer picture of the actual trend
– the fact this is rising suggests more counties are seeing a BIG retracement in COVID-19 cases.
Source: Johns Hopkins
And this is consistent with the trends we are seeing in daily cases. Below are the composites for the US states, based on our prior commentaries. This determination was made on 8/18, or 10 days ago:
– NY tristate + MA + RI (light blue)
– Current epicenter, FL, CA, AZ, TX, or F-CAT
– 18 states cases >12,500 per 1mm (close to herd) (grey)
– 29 states with low case prevalence (red) (as of 8/18)
As you can see, the F-CAT daily cases have utterly collapsed. And the 18 states with high prevalence are also rolling over.
– if there is a stubborn trend higher, it is the “red” line which are states with current low case prevalence. These are vulnerable states.
Source: COVID-19 Tracking Project
To see this trend, we listed the composite states side by side. As you can see, F-CAT and the 18 states have seen a sharp drop. But the 29 states have not yet seen a similar decline.
– the peak in these states is almost the exact same date, though.
– but the “red line” is curling upwards
– these are states with low covid-19 prevalence to start with.
Source: COVID-19 Tracking Project
I think these 29 states composite (as of 8/18) are actually seeing an uptick in cases. This is likely also being fueled by back to school. These 29 states have a case prevalence <12,500 per 1mm, which as we have written in multiple commentaries, is the informal infection breakpoint we previously tracked.
Source: COVID-19 Tracking Project
Since 8/18/2020, there are now only 16 states with cases <12,500 per 1mm….
There are now only 16 states, vs 29 on 8/18, with cases <12,500 per 1mm. So, this is good news, in a sense. After all, we are not seeing a surge in cases in Florida or Arizona, even as these states have many colleges and universities.
Source: COVID-19 Tracking Project
POINT 3: COVID-19 case are not created equally
The most intriguing story over the weekend, in my opinion, is this NY Times story. The author, Apoorva Mandavilli, suggests the PCR tests used to diagnose COVID-19 are too sensitive, relying on amplification measures to detect the virus. This article was flagged to me by a client out in San Francisco (thank you MH!). And it corroborates a conversation I had with one of my clients on Friday, with whom I had lunch on Friday.
– On Friday, this client relayed to me how a relative of his tested COVID-19 positive, but the doctor informed this person that there was a barely detectable level of virus in this person’s blood.
https://www.nytimes.com/2020/08/29/health/coronavirus-testing.html
The NY Times article is suggesting the standard PCR test to diagnose COVID is simply a binary test — A or B — one has COVID-19 or does not.
https://www.nytimes.com/2020/08/29/health/coronavirus-testing.html
However, there is some new research suggesting that up to 90% of the COVID-19 positive tests, have “barely any virus” and therefore, only 10% of those tests are actually contagious.
https://www.nytimes.com/2020/08/29/health/coronavirus-testing.html
Overly sensitive testing is going to hurt the public policy response…
This has important implications for public policy. Basically, if this information is correct, only those with high viral load need to be “contact traced” and even treated. And thus, the current regime of treating every patient equally is diverting important resources.
(*) 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.