Homebuilders "golden 6 months" starts October 20th --> worked 10 of last 12 years --> case stronger in 2021. 10 stocks

Click HERE to access the FSInsight COVID-19 Daily Chartbook.

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

Monday
Tuesday
Wednesday
SKIP THURSDAY
Friday

STRATEGY: Homebuilders “golden 6 months” starts October 20th –> worked 10 of the last 12 years –> case stronger in 2021

Could US cases fall to 50,000 before the end of October?
Daily case trends for COVID-19 remain promising.  There has been a sustained decline in cases and the arrival of booster shots, along with growing natural immunity means COVID-19 has fewer new victims.  In fact, as we discuss below, there is growing evidence that those previously infected and then getting vaccinated, have a super immunity — aka hybrid immunity.

– Daily cases 7D average is current ~85,000
– Down from 150,000 in late August

– Will this fall to under 50,000 by the end of October?
– Maybe. 

– We are watching the Northeast closely
– We are also watching positivity rate

These will be important factors.

Fortunately, there are no signs yet, of an upturn in cases stemming from the arrival of colder weather.  As shown below, the USA overall positivity rate is still sinking.  It now stands at 5.1% and is falling.  This has been declining steadily and an upturn here would be something we are watching for.

Even looking at the 9 states in the Northeast specifically, only New Hampshire and Vermont are seeing a sustained surge in cases.  In fact, Vermont is making new all-time high in cases.  This is obviously the impact of the Delta variant.

But hospitalizations throughout the Northeast are low, particularly compared to prior highs.  Even Vermont saw a far greater number of people hospitalized during the January 2021 timeframe than now.  This is even as Vermont cases are soaring to all-time highs.

US to lift international travel restrictions (inbound to USA) starting November 8th
This announcement came Friday (Oct 15th) and is a biggie.  The White House announced last Friday that travel restrictions for fully vaccinated visitors will be lifted on 11/8.  The list will encompass an additional 26 nations, called “Schengen countries” (see article below) and includes most of the nations we all know.  Prior to this restriction, the US still allowed inbound travelers from 150 nations.  But this expands the list.

– this is a significant step towards “normalizing” life
– the beneficiaries of this are companies catering to travel, such as airlines, cruise lines, hotels, restaurants, cities with tourism
– these are all “epicenter” industries  BETZ 0.64%  JETS 0.00%  CCL -0.14%  OIH 0.90%  XLE 0.01%  XLI 0.70%  XLB 1.02%  QQQ 2.13%  XHB XLF 0.30%

Obviously, this is a huge tailwind for Epicenter stocks.  And, a further fundamental argument to support being overweight on Epicenter stocks into YE.

Hybrid immunity, those previously infected + vaccinated, have superior immunity
This article was published in Nature.com last week.  Scientists are studying why those previously infected with COVID-19 AND vaccinated seem to have a superior level of immunity — aka super immunity — aka hybrid immunity.

– this conclusion might not be entirely surprising, given it is relatively intuitive
– but it strongly argues that those previously infected, actually benefit from vaccination as well
– the mechanism is not entirely clear
– scientists suspect it is due to memory b-cells

– some scientists think the “third dose” might act similarly to the hybrid immunity effect
– this would be a significant positive if true

STRATEGY: Uptrend resume = YE rally intact.  October 20th is start of “best 6 months” for homebuilders For basically all of 2021, the S&P 500 has risen in the face of deep skepticism, particularly from market pundits. Here are some snapshots over the past 10 months:

– S&P 500 (SPY 1.36% ) fell in January –> pundits called a top
– Lumber prices soared –> pundits called a top
– COVID-19 Wave 3 happened –> pundits called a top
– Interest rates surged in Spring –> pundits called a top
– FAANG rolled hard in Spring –> pundits called a top
– Delta variant surged –> pundits called a top
– GDP growth slowed aka “peak everything” –> pundits called a top
– Oil prices (XLE 0.01%  OIH 0.90% ) fell 20% –> pundits called a top
– Stocks fell 5% in September –> pundits called a top

See the pattern?  Every time something has wobbled in 2021, pundits have called a top.  There will be a market top, so top callers will eventually be proven correct. 

– But why should it happen in the final 3 months of 2021?


…S&P 500 closed above its 50-day moving average = uptrend resumes
In fact, as shown below, the S&P 500 managed to close its 50-day moving average last Friday.  In our view, this is a sign of the resumption of the uptrend.  And given the following constellation of factors, we see stocks surging into YE:

– positive seasonals  = positive
– 3Q2021 results showing margins still expanding  = positive
– supply chain bottlenecks easing  = positive
– investors remain wary = positive
– technicals improving  = positive
– Fed still supportive  = positive
– COVID-19 trends promising  = positive

In short, we see stocks rallying into YE.

HOMEBUILDERS: “Golden 6 months” –> that time of year again, October 20th to April 30th
For those long-term (longer) clients of FSInsight, you might recall that we annually highlight the “Golden 6 months” trade for homebuilders (ETF XHB).  We have included the covers from the reports from 2018 and 2019 below.  In 2020, we also highlighted this trade, but we wanted to show the original reports:

– October 20th to April 30th is the best 6 months for XHB
– Average gain is 17%, beating S&P 500 by 1,130bp
– Since 1999, this works best when interest rates are rising

– Worked 10 of last 12 years
– In 2020, XHB rose 25% during the “golden 6 months” beating S&P 500 by 300bp

GOLDEN 6 MONTHS: Homebuilders rise 17%, and works better when rates are rising by 410bp
The annual returns of this strategy are highlighted below starting with 1999, or 23 years.  The contours of this trade are readily apparent:

– Homebuilders don’t really come to life until October 20th and rally through April 30th
– Returns “Golden 6 months” –>  17.1%
– Returns “rest of time”          –>   -0.9%
– win ratio 77% vs 41%

So, you get the picture.  Why does this happen?  I am not entirely sure.  Does this have to do with the homebuying cycle itself? We know housing demand is the strongest in the Spring.  So is this simply just an artifact of that?  Equities are generally a mystery, so I cannot offer any insight. 

This trade did not work in 2015 and 2019 (Spring 2016 and Spring 2020) –> but works best during rising rates
In the last 12 years, there are only 2 years this did not work:

– 2015 –> Spring 2016 had a big market correction
– 2019 –> Spring 2020 was COVID-19

So, an obvious observation is this trade did not work in years where the S&P 500 does poorly in the Spring.  Will Spring 2022 be a market correction?  I don’t know.  But if it is, the odds of this trade working will fall.  After all, homebuilders are not a “defensive” group. 

But you might wonder if rising rates hurt this trade.  That is not the case.  Our data science team parsed returns during years of rising and falling interest rates.  Roughly half the years are rising rates:

– during “rising rates” Golden 6M return –>  +20.8%
– during “falling rates” Golden 6M return –> +16.7%

So the returns are superior during a rising rate environment.  Rates are rising in 2021 generally, so this arguably bodes well for this trade to work better in 2021. 

– Why would higher rates help?
– Aren’t housing demand cycles negatively correlated to rising rates?
– Yes, but perhaps rising rates hurts smaller builders, thus, favoring the value capture of the publicly-traded builders

In fact, the homebuilders today are far better companies in general.

HOMEBUILDERS GOLDEN 6 MONTHS: 2021 is a good set-up
We think 2021 is a great setup for this trade to perform.  Again, the premise is that Homebuilders perform best between October 20th and April 30th. 

Why would 2021 be better?

– Homebuilders are just closing above the 50-day moving average
– Homebuilders have been consolidating for most of 2021 (see below)
– Lumber prices and other supply chain issues hurt homebuilders in 2021
– These are beginning to ease
– Homebuilders ROE is still surging = upside potential

But there are headwinds, so this is not a “risk-free” proposition:

– Affordability is being questioned given surge in prices
– Shortage of workers means uncertainty
– Fed could be tapering –> will this hurt?

BOTTOM LINE: These are the 10 largest homebuilders…
We have listed 10 homebuilder equities.  The strategy basically says Homebuilders should outperform 10/20 to 4/30.  Sort of straight forward:

ETF –> XHB ITB 1.71%

Individual stocks:
DHI 2.08%
LEN 1.86%
NVR 1.44%
PHM 2.45%
TOL
MTH 2.26%
KBH 4.04%
TMHC
SKY
LGIH 4.81%

26 Granny Shot Ideas: We performed our quarterly rebalance on 07/30. Full stock list here –> Click here

POINT 1: Daily COVID-19 cases 12,677, down -9,665 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases   12,677 vs 22,342 7D ago, down -9,665
• Daily cases ex-FL&NE   12,677 vs 19,120 7D ago, down -6,443
• 7D positivity rate  5.1% vs 5.9% 7D ago
• Hospitalized patients   54,033, down -10.3% vs 7D ago
• Daily deaths  1,159,   down -30.8% 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 12,677, down -9,665 vs 7D ago. As evident by the once again consistently negative 7D deltas, the Columbus Day distortion appears to have cleared out.

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

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 

POINT 2: VACCINE: vaccination pace trending up once again…

Current Trends — Vaccinations: 

• avg 0.8 million this past week vs 1.0 million last week
• overall, 56.5% fully vaccinated, 65.3% 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 80% combined penetration
– Given the new multiplier. only RI, FL, MA, CT, NM, NY, NJ, IL, CA, PA, DE, and SD 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 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 810,829 doses administered reported on Sunday, up 6% 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.

73.9% 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 96.3%. 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%, 90.6% of them have seen 1 dose penetration >55% and 73.9% 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, 405 million vaccine doses have been administered across the country. Specifically, 217 million Americans (66% of US population) have received at least 1 dose of the vaccine. And 188 million Americans (57% 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.