The biggest news this week, in our view, is the CDC announcement that “fully vaccinated Americans” no longer need to use masks. This a validation of the effectiveness of vaccines and also bodes well for many Epicenter businesses such as cruise lines that have been left in limbo by restrictions. More importantly, it’s a huge step toward returning to normalcy. I realize there are many Americans of the extreme view- either COVID-19 doesn’t exist or the opposite and CODI-19 changed the world forever.
The CDC guidelines bring some convergence on one side of the extreme and it is quite an abrupt change in the CDC stance. Only last week they published a forecast (which we feel validated in pointing out as peculiar at the time). We think it is only natural for the CDC to soon lift restrictions in many Epicenter industries particularly those that are related to travel and leisure. Indeed, as you can see in point #3 of our dailies this is already occurring in many states. Given recent developments, it still seems we are on track for a full-scale re-opening of the US economy by mid-year. This is incredibly bullish.
Furthermore, cases appear to be rolling over in India based on our analysis of the data. The best evidence is that overall cases are fading. Cases are not flat to rolling over in the 10 largest regions of India. Thus, no major region is seeing a rise in cases and so even with variants and mutation risk the worst of the crisis in India appears to be at behind us. This significantly mitigates a tail-risk that may have been attracting investors to the stay-at-home and safety trades of a renewed global economic shutdown due to COVID-19. The risk of this are drastically diminishing in our view.
The latest COVID-19 daily cases number came in at 35,921 which was down 6,093 from 7 days ago. The 7D delta has been negative for the past month and if the speed of the decline continues then we could see daily cases drop below 20,000 next week and below 10,00 in two weeks.
As we wrote before, at this stage of the pandemic, as long as vaccination prove effective, the vaccine rollout will eventually lead to a decline in the pervasiveness of the COVID-19 pandemic. In fact, the progress of vaccination coincided with the recent decline of the number of new cases in the US similar to what we see in Israel. Therefore, even as restrictions loosen at this time, rates of infection do not appear to be rising and this is almost certainly due to vaccine penetration.
Overall, 34.9% of Americans have been fully vaccinated and 35.9% have received one dose. All states have reached, or are very near, the critical combined level of immunity of 70%
STRATEGY: We think the bottom of the sell-off for Epicenter//Small-caps is in… not necessarily for Tech.
This has been a tumultuous week. There have been multiple downdrafts in equities, triggered by panic associated with headlines. There was the Druckenmiller interview and widespread Fed criticism as well as the CPI urger. This all coincided with tax day which usually causes selling to raise cash. The VIX surged 80% but has fallen significantly since. Usually the VIX peaks at market bottoms and we think this is no different, it closed below $19 on Friday, which is a pretty rapid collapse. We hope you found our intraday blasts actionable and helpful during this week’s tumult.
If inflation such a concern than why is the 10-year still below the March yield highs of “rate-mageddon?’ I think it is odd it didn’t spike more. The bond market was more concerned with inflation in March than it is now. That is telling. High-yield also continues to hover near all-time lows. Epicenter also outperformed this week, all groups beat the S&P except for Consumer Discretionary.
We think this is because Discretionary is the most crowded Epicenter group and it is the most familiar to hedge funds and growth managers. Growth managers and institutions de-risked this week and we think it seems at least some of that was at the expense of discretionary
Growth managers also appear to be rotating out of technology and into Staples and Health Care. We flagged this last week and our rationale for downgrading Technology was that the trade is far too crowded. We upgraded Consumer Staples to N from UW as we expected Staples to be a natural beneficiary of Growth managers rotating out of some Technology names.
So, we think a short-term bottom has developed and markets are poised for a leg higher. Nearly 40% of the world are commodity producing countries and these will be booming economies. Equities tied to Europe improving would also benefit from re-opening. The market just attempted a downward crash and it appears to have held nicely. We think the bottom is in. The lifting of restrictions, cases getting better in India, failed downward crash and the bullish DeMark indicators we’ve discussed for small caps are all highly bullish and give us confidence in this conclusion.
Bottom Line: We remain positive on equities and see signs of capitulation. Out top three sectors remain Energy, Materials and Financials. We are cautious on Technology and recommend using strength to reduce and allocate into Epicenter stocks. We think small caps (IWM -0.44% ) are set for a big rally.
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
