3 reasons we see a "violent" v-shaped rally in February, but in context of treacherous 1H2022

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STRATEGY: 3 reasons we see a “violent” v-shaped rally in February, but in context of treacherous 1H2022

NYC to offer free same-day delivery of COVID-19 antiviral pills = great news.
Newly-elected NYC Mayor Eric Adams announced the city will offer free same-day delivery of COVID-19 antiviral pills. Because supplies are limited, there will be some prioritization/rationing of those receiving these pills. Still, this is good news and is helpful to those residents unvaccinated and for those vaccinated residents with some existing co-morbidities (pre-existing condition).

– there are two medications approved for emergency use authorization
– Pfizer’s Paxlovid and Merck’s Molnupiravir
– Both drugs required a series of pills to be taken daily.

– Paxlovid regimen is 30 pills, three tablets taken 2X daily for 5 days
– Molnupiravir regimen is 40 pills, four pills every 12 hours for five days

Is it possible the pendulum is finally swinging towards limiting govt COVID-19 reach?
The WSJ Op-ed below caught my eye. It is authored by the managing editor and speaks about the possibility that the US might possibly be at a Libertarian moment. There are several encroachments cited including freedom of speech, increases in spending and general reductions of freedom. This is apparent to anyone who has witnessed policy and policy response in the last two years, but it does seem like there is finally pushback from Americans on this.

…by contrast, in the UK, there is a movement to cancel Boris Johnson for COVID-19 rules violations
In the meantime, the UK is seeing rising umbrage over PM Boris Johnson’s failure to stick with COVID-19 rules. The investigation underway by senior civil servant Sue Gray cites several infractions during the lockdowns — including alcohol fueled parties. While I certainly appreciate that leaders need to follow rules that are in place, the calls for resigning seem almost ludicrous. Is it just me?

…And even Canadians are getting tired of COVID-19 rules
We are seeing Canadians protesting COVID-19 mandates. What has started off as truckers protesting cross-border vaccination requirements has been gaining momentum as a general protest. This comes at a time when PM Justin Trudeau has himself tested positive for COVID-19.

– the takeaway, for me
– is the world is getting tired of COVID-19 lockdowns

– yet, China and much of Asia still pursue this policy
– how long can the world have two sets of standards?

STRATEGY: 3 reasons we see a “violent” v-shaped rally in February, but in context of treacherous 1H2022
Equities performed poorly in January, with the S&P 500 on track to decline 5% and the tech-heavy NASDAQ down 9%. In general, this is a poor start for 2022, but we don’t see this boding poorly for the full year. But with equities down in the first month, it is clear that investors are “on their heels” and given the sharpness of the decline, has undermined investor confidence about equities in general.

But in many ways, the awful decline for markets in January, in my view, is setting up for a strong February. As many of our clients recall, one of our frameworks for broader markets (not necessarily single stocks) is the symmetry of markets — that is, the faster the decline, the faster the bounce.

There are 3 reasons we see this in February:

– Retail investors raised cash at the fastest pace since before the pandemic –> contrarian buy signal
– S&P 500 daily RSI fell to 26, the lowest reading since March 2020 –> oversold = buy signal
– Retail sentiment (AAII) fell to the worst reading since 2013 –> contrarian buy signal

In short, retail investors, about 40% of trading volume have become “bear market bearish” in January. And with nearly half the equity market that structurally bearish, we see this as a contrarian buy signal.

…retail cash balances soared in past month = contrarian buy signal
Take a look at the ICI cash balances and the surge in the past month. While institutional cash balances have been falling, meaning institutional investors are putting cash to work, the opposite is the retail investor.

– it looks like a nearly vertical rise in the past 4 weeks

S&P 500 daily RSI most oversold since March 2020
Another reason we see a strong V-shaped bounce forming is the magnitude of the S&P 500 sell-off. A measure for this velocity is the daily RSI (relative strength index) and as shown below, the daily RSI fell to 26:

– Daily RSI of 26 is the worst since March 2020
– markets staged a fierce V-shaped rally in March 2020

With retail investors bearish, this oversold RSI is evident that retail investors sold rapidly and quickly.

…AAII sentiment so bearish, 6 of 6 most recent instances saw markets higher 3M later (6 of 6 times)
As we flagged last week, the AAII (American Association of Individual Investors) retail sentiment survey, shows investors are extremely bearish:

– The net % bulls less % bears is -29.8
– this is the lowest reading since 2013
– the 6 precedent worst readings are shown below

We like this series because it is one of the longest running series on investor sentiment (since 1987). And moreover, at the extremes, we view this as a contrarian indicator.

The forward returns of the S&P 500 for those 6 instances is shown below. Notice the startling forward returns?

– 6 of 6 times, markets were higher 3M, 6M and 12M later.
– in fact, the median returns are well above what is expected in any relevant period
– this further supports the notion of a V-shaped bounce

…But broader message is that we expect 1H2022 to be tough, and 2H2022 to be far stronger
But the message from a weak January also reminds us that 1H2022 is likely to be tough. There have been 12 precedent instances, since 1938, where markets are down in January and the US economy is in expansion:

– mean 1H return in -0.3%
– Feb to 1H mean return is 2.9% (so better)

– but 2H mean return is 7.8%
– this is far better

– most recent instances –> 2021 and 2016

Most investors can recall that both periods were tricky 1H markets. And the stronger returns came in 2H.

Bottom line, we think 1H2022 remains treacherous. There remain too many potential headwinds which we list below. Conversely, we see many of these turning into tailwinds in 2H2022.

STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)
Our 2022 themes are shown below. And in not in any order:

– Bitcoin + Bitcoin Equities BITO -1.45%  GBTC -1.48%  BITW -1.31%
– Energy
– FAANG FNGS -0.66%  QQQ -0.25%

Combined, it can be shorted to BEEF.

– Homebuilders (Oct – Apr aka Golden 6 months) XHB

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

POINT 1: Daily COVID-19 cases 683,926, down -456,268 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 683,926 vs 1,140,194 7D ago, down -456,268
• 7D positivity rate 22.0% vs 26.3% 7D ago
• Hospitalized patients 126,019, down -12% vs 7D ago
• Daily deaths 2,398, up 4.2% vs 7D ago

The latest COVID-19 daily cases came in at 683,926, down -456,268 vs. 7D ago. The chart below shows the dramatic drop in daily cases compared to the past few weeks. In fact, yesterday all US states reported a lower case figure compared to 7D ago (Arkansas has not reported COVID stats over the weekend due to a system upgrade, which artificially caused the “reported” cases to be higher, but the actual cases should be lower). This again reflects the Omicron wave is in full retreat across the nation.

Another major development in the COVID-19 pandemic is that the daily deaths in the US seem to have peaked and are starting to roll over. As the COVID case rollover across the nation, we have seen other metrics, such as hospitalization, positivity rate start to decline. And as shown below, the daily deaths seem to finally roll over as well.

– US daily cases have been in a downtrend for 17 days.
– According to prior waves, there tends to be a 2-3 week lag between daily cases and deaths
– A rollover in daily deaths now is consistent with what we have observed in prior waves.

7D delta in daily cases has been negative in 11 of past 12 days…
The decline in the 7D delta in daily cases persists. The latest 7D delta is -456,268, and this big decline is not caused by any data distortion. About three weeks ago, the 7D delta (7D trend) was still +300,000 and now it has fallen to -280,000. This reflected the rapid and steady decline in daily cases. And if this trend persists, we could see the daily cases further accelerate to the down side.

Only 5 states are still seeing a rise in cases while 45 states + DC are seeing cases falling…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), 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

Daily deaths are still rising, while positivity rates and hospitalization are falling 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

– Net hospitalization started to roll over. And more importantly, the daily mortality did not follow the same pattern as hospitalization, which shows Omicron is less deadly compared to other variants (at least so far).
– Positivity rate finally started to fall after plateauing for two weeks. It also confirms the recent decline in daily cases.

POINT 2: VACCINE: vaccination pace has slowed recently… Still more than half of eligible people have not received their booster shots…

Current Trends — Vaccinations:
– avg 0.8 million this past week vs 1.0 million last week
– overall, 26.9% received booster doses, 63.6% fully vaccinated, 75.0% 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 MS, WA, OR, TX, 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

There were a total of 503,966 doses administered, as reported on Monday. The overall vaccine pace has slowed and the daily number of vaccines administered has been down over the past week. This probably is partially due to the improving COVID case trend. But given the benefits that vaccination provides:

– reduce severity –> reduce hospitalization –> prevent healthcare crisis
– reduce the transmission of virus
– we believe the daily number of vaccines administered remains the most important metric to track.

And as we noted previously, there are still half of booster-eligible people (more than 80 million) who have not yet received their booster dose. Hence. to convince these people remains the key.

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

In total, 539 million vaccine doses have been administered across the country. Specifically, 249 million Americans (75% of US population) have received at least 1 dose of the vaccine. 211 million Americans (64% of US population) are fully vaccinated. And 89 million Americans (27% of US population) received their booster shot.

POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***

As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. 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
– Opposite effects hold true in the winter

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.