Fri, April 23, 2021 | 9:35PM ET

Cases Break Downward, Epicenter and Small Caps Primed

Name: FS Insight
Price range: $$$

We sent out an alert earlier this week about a pretty dramatic improvement in the case trend. The 7D delta took a major down leg with cases collapsing across several states in particular. Michigan and New York both had drops greater than 1,000 in their 7D delta which is encouraging. This trend is so far continuing and the rate of vaccinations compared to new cases is at about 45 to 1. This is one of the most important numbers and it has remained consistently high.

Cases Break Downward, Epicenter and Small Caps Primed — Source: FSInsight and state health departments

The key question is whether this is just noise or if it is a genuine collapse. Given that the United States has recently eclipsed the level of 40% vaccine penetration which proved a turning point in Israel, we are venturing that this is the beginning of some serious downward action with regards to COVID-19. If the US were to match Israel’s path with regard to vaccinations and new infections then we would be at 8,500 cases a day by June.

This is exciting news and if it is true we think that the natural implication is that Epicenter will rise. If there is truly a downside breakout occurring in the case data then Epicenter, which has lagged as COVID progress has stalled, should take-off. Travel, Hotels and Airlines should be big beneficiaries. We also like Epicenter proxies like IWM and SPHB. We think the Energy and Materials trade will resurge in a big way. XLE, OIH, KLXE and CLF should all be beneficiaries of this as well.

The bottom line is that the collapse in cases is a very significant bullish development. Recall, that we saw a ‘13’ buy signal for XLE recently (based on DeMark indicators) and this improvement in case trends would likely amplify that even further.

For more from Tom DeMark’s updated views on Equities and Bitcoin be sure to tune in for a webinar that I will be hosting with him on April 28^th. We’re grateful to do events with this Wall Street legend and you definitely DO NOT want to miss this event. You can register for that webinar here.

STRATEGY: Food for thought on small-caps and Energy
We have been expecting that small-caps and Epicenter stocks would get “rejuvenated” once US COVID-19 cases started to roll over. And this week, we believe we got the “leg down” in USA COVID-19 cases. And as the chart below shows, if cases are rolling over, then the “epicenter” trade is back.

Not only are health trends moving in the right direction but a lot of Epicenter names have been having very strong earnings that seem to indicate our thesis about the businesses becoming lean and mean when revenue was constrained. Operating leverage has been off the charts for many names. Because of the convergence of tailwinds on both the top and bottom line and stable interest rates, I think the S&P 500 could see 4,400 by June.

While there have been more rumblings about a potential correction bubbling up in the financial media, I believe the ongoing ‘rolling corrections’ that have been occurring sector by sector have primed the market pretty well for a leg higher after stalling for the last month. Some think the good news is all baked in and we do not agree with that. We think the Cleveland Cliff’s earnings among others are showing that the consensus has undershot the scale of the EBITDA recovery significantly in their forecasts. We believe this macro environment will be favorable for Epicenter stocks for a while as it is more reminiscent of a post-war cyclical expansion than a typical run-of-the-mill recovery.

STRATEGY: Buy small-caps (proxy is IWM), Epicenter (SPHB, etc) and Energy
And to reiterate, we believe the Epicenter trade is coming back on strong. The trade consolidated for the past few weeks and it was a rocky period. But today, it looks like the Russell 2000 is on its way to breaking out.

– the key level on IWM is $226.69 (the most recent high), but once that is cleared, we think IWM can make all-time highs
– Small-cap index Russell 2000 is a good epicenter proxy because it is chocked full of cyclicals.

The other sector that we think will soon be a major beneficiary, if US COVID-19 cases are legging down, is Energy. Energy is arguably the most sensitive to an economic re-opening because the movement of goods involves consuming some form of Energy.

– Oil is now +1% compared to where it was on 12/31/2019
– Energy sector (XLE) is still -21% lower and Oilfield Services (OIH) is -33% lower

How can the Energy equities retracement be lower than the commodity price? This makes little sense to me. This is why we see a big catch-up trade in XLE and OIH coming. One where XLE could rise >45% or more and OIH >100%

Figure: Way forward ➜ What changes after COVID-19
Per FSInsight

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019

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