First Word

COVID-19 UPDATE: Is the "vaccine leg down" starting? US COVID-19 7D delta cases accelerating to downside -- 17,697 vs 7D ago Small-caps (ETF IWM) are experiencing their 13th >5% drawdown since March 2020 (=1 every month)

April 21, 7:50 AM ET

Tom Lee

Head of Research

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 NO REPORT (getting vaccine shot #2)

I want to give our clients a heads up. I am getting my second COVID-19 vaccine shot on Thursday (Moderna) and I have been told there are some side effects. Thus, I am not planning to publish our report this coming Friday.

STRATEGY: Small-caps (ETF IWM) experiencing 13th >5% drawdown since March 2020 (=1 every month)

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Current Trends -- COVID-19 cases:
- Daily cases 54,720 vs 72,417 7D ago, down -17,697
- 7D positivity rate 5.2% vs 5.4% 7D ago
- Hospitalized patients 42,365 up +3.3% vs 7D ago
- Daily deaths 703, down -3.1% vs 7D ago

Current Trends -- Vaccinations:
Vaccinations ramping steadily
- avg 3.0 million this past week vs 3.4 million last week
- overall, 25.8% fully vaccinated, 39.9% 1-dose+ received
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Is the "vaccine leg down" starting? US COVID-19 7D delta cases accelerating to downside -- 17,697 vs 7D ago
Earlier this week, we posted the below chart because as the US is nearing the 40% of Americans (with 1-dose) and in Israel, that threshold triggered a "leg down" in case figures (see below).

US daily cases 7D delta looks like it triggered an avalanche to the downside today (see below). Daily cases are -17,697 vs 7D ago. This is a huge drop. In fact, it is the biggest drop since December 2020.

And on the absolute case basis, daily cases came in at 54,720, which is way down from 72,417 cases this day last week. Downward trends in cases = good. But it is also good given the surge in cases in Michigan (things would be way better if not for that) and also good given the concerns of the spread of variants.

- and unlike many predicted, the US did not follow the path of Europe and see a renewed surge in cases

We are still trying to understand Michigan case surge...
If there are places that seem to be cited by our clients as potential problem spots, there are two places in the World:

- Michigan, which is seeing surge in cases despite restrictive measures
- India, because COVID-19 cases and deaths are surging

Below is the comparative trend of Michigan cases (per 1mm residents) compared to USA overall. We can look at the change in relative trends. For much of the pandemic, MI and USA tracked each other pretty closely:

- the divergence started in mid-February
- MI cases surged to essentially new highs, while USA cases have been muted

A number of you have sent me explanations for this MI surge: Spring Break, COVID-19 fatigue, sports season, etc. But the interesting thing is MI divergence from USA trends was only seen in a few other states, including MN. So there was some reason this was happening here.

And looking at the overall demographic data is not that helpful. As shown below, MI mix of race, per the Census bureau, is pretty similar to the rest of the US.

- fewer Asians in MI, half of the US levels
- White is higher, but white is any race, whether, European, parts of Middle East, etc.

And the COVID-19 race breakdown is pretty similar to the US. The only group with higher than US levels is Black/African American. But this does not explain the surge in MI in the past few months. After all, nearly 80% of the cases are "white" -- again, White can be a minority group in MI, because there are ethnically distinct areas of MI, but their race categorization would be "white."

- if anyone has more color, please send this along
- maybe the best development is that MI daily cases seem to be slowing/peaking = good

COVID-19 global deaths are nearing all-time high...
And as for the rest of the World, COVID-19 continues to spread rapidly. Instead of daily cases, we thought it would be useful to look at daily deaths. The chart below shows USA and the worldwide figures.

- USA daily deaths peaked in late January and have since fallen sharply, aided by growing vaccine penetration
- Global daily deaths are surging and about 12,000 people are dying daily

Regionally, we can see the surge coming from two areas of the World:

- Latin America deaths are rising steadily and surpassed Europe a week ago
- India is seeing a surge in the past few weeks, surpassing the US recently

The surge in India makes the case for vaccinations that much stronger. And as many of you have pointed out, raised the urgency of getting vaccines to other nations. The different trajectories of COVID-19 cases are a reminder that nations with higher vaccine penetration are doing better.

STRATEGY: Small-caps (ETF IWM) are experiencing their 13th >5% drawdown since March 2020 (=1 every month)For potentially multiple reasons, equity markets have become defensive in the past three weeks, evidenced by the resumed leadership of FAANG, defensive stocks and growth stocks. And cyclical stocks, such as small-caps (IWM), energy and other sectors have lagged. There are known factors:

- unwind of leveraged trade by prime brokers
- Cyclicals overbought technically (as noted by Brian Rauscher, head of global portfolio strategy)
- too much "good news baked in"
- renewed outbreaks in MI and India, risking a faltering of the re-opening

And I might add another observation. It seems like Cyclicals took another leg down this week, on the heels of the 15% Bitcoin selloff over the weekend. This is not as implausible as one might think:

- hedge funds are long or short bitcoin futures (via CME or even via crypto exchanges)
- the sudden fall in Bitcoin over the weekend could have put some HF offsides
- there are reports of some HF offices being occupied over the weekend, in Europe and in USA
- such losses could trigger a further de-risking of portfolios = added selling pressure this week

So perhaps the drawdown in Bitcoin $BTC was simply another incremental headwind.

Source: https://twitter.com/fundstrat/status/1384581356672401414

...Russell 2000 is experiencing its 13th >5% drawdown in 13 months
The recent 5% decline in the Russell 2000 has been painful and stands in contrast to the steadier gains seen in S&P 500. However, the Russell 2000 ($IWM ETF) is a volatile index by nature. As shown below, since March 2020:

- since March 2020 (13 months ago)
- Russell 2000 has seen 13 drawdowns of >5%
- Russell 2000 has seen 6 drawdowns of >10%

In other words, IWM is inherently volatile. So the recent plunge, while painful, is sort of part for the course. But during this time, IWM has seen an overall huge rally in price.

Bottom line: we remain favorable to small-caps and Epicenter, even as the past 4 weeks have been a disaster
We realize many of you are tired of us writing about cyclicals, aka epicenter, and IWM (small-caps as a proxy). Namely, because epicenter has been a terrible trade for the past month, and perhaps many of you might even think we are simply fighting the market. I don't want to fight the tape, so I am increasingly aware of this fact.

However, the downturn in relative performance of small-caps (IWM) has not been confirmed by other markets:

- credit markets are still "cyclical" oriented as high-yield outperforms investment grade
- oil prices have begun to strengthen = favorable for Epicenter, but epicenter is sliding
- DJ transports are still leading and historically highly correlated with small-cap leadership
- IWM ETF short interest has soared

The DJ transports have been strong since the March 2020 lows and is plotted on the chart below as the red line. As you can see, even in 2021, this strength and leadership has continued. This is a cyclically strong sign:

- DJ transport leading = greater movement of goods
- strong economic recovery

And for the past 5 years, the relative performance of transports (vs DJIA) has coincided with relative performance of small-caps (vs Nasdaq 100).

- but since mid-March, this linkage seems to be broken

Why are small-caps underperforming yet transports are leading?

The chart of transports vs IWM is nearly identical to the prior charts we published on "cyclical credit" vs small-caps:

- price ratio of high-yield / investment grade (HYG/LQD) is a proxy for cyclical credit trade
- for past 10 years, this credit quality ratio is highly linked to performance of small-caps (vs Growth + tech)

- this linkage seems to have broken mid-March

The breaking of this linkage coincided with the divergence of small-caps vs transports.

Is the prime brokerage leverage unwind partly responsible? Can fundamentals explain this?
While many of our clients have pointed out that the downturn in small-caps is simply a mid-cycle development, that seems to defy the divergence with transports and with credit markets. If markets were pricing in peaking of economic momentum, we would expect cyclical credit to worsen and for transports to trail the DJIA.

But there have been some exogenous events, that could be more locally involving equities:

- 6 prime brokers unwind of a family office using quite of lot of leverage
- did Bitcoin 15% drawdown over the weekend trigger losses at a major hedge fund? Maybe

Short interest in IWM has surged in the past two weeks as this chart below shows. So HF have become incrementally more bearish on cyclicals. Is this incremental bearishness justified given the surge in MI and India? I don't think so.

So for now, we continue to recommend strongly overweighting the following:

- Epicenter stocks --> travel, hotels, industrials, discretionary
- Small-caps --> IWM good proxy for Epicenter
- keep in mind IWM has seen 13 5% drawdowns in the past 13 months
- Energy, $XLE and $OIH given the strengthening prices in oil --> positive alignment of supply and demand

For the moment, this has been a painful recommendation but we think this is the ideal positioning for the remainder of 2021.

...Brian Rauscher, Head of Global Portfolio Strategy, continues to favor moving down "in market-cap" and OW Cyclicals
Our head of global portfolio strategy, Brian Rauscher, also sees favorable internals for cyclicals and for mid- and small-cap stocks. Below is the excerpt from his latest "Wall Street whispers" -- his recommendations:

- Value/Cyclicals over Secular Growth/FAANG
- SMid over Large

- Rauscher is seeing key indicators beginning to STRENGTHEN and expects even more

ADDENDUM: We are attaching the stock lists for our 3 portfolios:
We get several requests to give the updated list for our stock portfolios. We are including the links here:

- Granny Shots --> core stocks, based on 6 thematic/tactical portfolios
- Trifecta epicenter --> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Technicals
- Violence in USA --> companies that are involved in some aspect of home or personal security. We are not "recommending" these stocks, but rather, bringing these stocks to your attention.

Granny Shots:
Full stock list here --> Click here
Tickers: GOOG, AMZN, EBAY, GRMN, TSLA, BF/B, MNST, MO, PG, PM, PSX, AXP, BIIB, GILD, REGN, AAPL, CSCO, MSFT, MU, MXIM, NVDA, PYPL, QCOM, QRVO, SWKS, XLNX, D, EIX

Trifecta Epicenter (*):
Full stock list here --> Click here
Tickers: AAP, AN, AZO, F, GM, HOG, BBY, GRMN, GPC, LEG, TPX, PHM, NWL, MAT, PII, RL, MGM, HLT, MAR, NCLH, RCL, WH, TNL, SIX, FL, GPS, KSS, LB, VFC, WTFC, ASB, FNB, PB, TFC, WBS, PACW, NYCB, MTG, EVR, IBKR, VIRT, BK, STT, BHF, AGCO, OC, ACM, WAB, GNRC, CSL, GE, GGG, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, EAF, ITT, ALK, DAL, JBLU, LUV, MIC, KEX, JBHT, R, UBER, UHAL, MAN, XOM, HP, BKR, HAL, NOV, SLB, COP, EOG, FANG, HES, MRO, MUR, PXD, XEC, HFC, MPC, PSX, EXP, CF, NEU, NUE, RS, SON, IP, ARE, BXP, HIW, JBGS, ESS, UDR, KIM, NNN, O, WRI, PSA

Violence in USA:
Full stock list here --> Click here

(*) 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.

POINT 1: Daily COVID-19 cases 54,720, -17,697 vs 7D ago... 7D delta has been negative in the past seven days and accelerated to the downside...

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Current Trends -- COVID-19 cases:
- Daily cases 54,720 vs 72,417 7D ago, down -17,697
- 7D positivity rate 5.2% vs 5.4% 7D ago
- Hospitalized patients 42,365 up +3.3% vs 7D ago
- Daily deaths 703, down -3.1% vs 7D ago
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- The latest COVID-19 daily cases came in at 54,720, down -17,697 vs 7D ago.

- After surging to 16k on last Tuesday, 7D delta in daily cases has turned negative in the past seven days. Today, the 7D delta has plunged to down -17k!!! This is the biggest decline since mid-February.

- As we wrote before, at this stage of pandemic, as long as vaccinations work, eventually the rollout of the vaccines will lead to a decline in the pervasiveness of the COVID pandemic. And according to the recent data, this decline seems to finally arrive.

7D delta in daily cases has turned negative in the past seven days...
After surging to 16k on last Tuesday, 7D delta in daily cases has turned negative in the past seven days. Today, the 7D delta has plunged to down -17k!!! This is the biggest decline since mid-February. As we wrote before, at this stage of pandemic, as long as vaccinations work, eventually the rollout of the vaccines will lead to a decline in the pervasiveness of the COVID pandemic. And according to the recent data, this decline seems to finally arrive.

US hospitalization still rolling over ... and even US deaths seem to be rolling over...
Below we show the aggregate patients who are currently hospitalized due to COVID. It has fallen significantly from the wave 3 peak.

POINT 2: VACCINE: 49 states near ~60% infected + vaccinated... 1 in 4 Americans have been fully vaccinated...
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Current Trends -- Vaccinations:
Vaccinations ramping steadily
- avg 3.0 million this past week vs 3.4 million last week
- overall, 25.8% fully vaccinated, 39.9% 1-dose+ received
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Vaccination frontier update --> almost all states now near or above 60% combined penetration (vaccines + infections)
Below we sorted the states by the combined penetration (vaccinations + infections). As we commented in the past, the key figure is the combined value >60%, which is presumably near herd immunity. That is, the combined value of infections + vaccinations as % population > 60%.

- Currently, all states except OR and HI (see below) are basically all at this level
- SD, ND and RI are now above 90% combined penetration (vaccines + infections)
- So slowly, the US is getting to that threshold of presumable herd immunity

Collectively, these 49 states represent about 97.3% of the US population. In fact, 77.5% of US states (based on state population) have seen combined infection and vaccination >70% and 40.9% of US states have seen combined infection and vaccination >80%. As the chart below highlights, the US is seeing steady forward progress and this figure continues to rise steadily.

There were a total of 1,797,971 doses administered on Tuesday, down 30% from 7D ago. The 7D moving average has been trending downward recently. It coincides with the pause of the JNJ vaccines. However, compared to the beginning of the year, the current pace is way faster.

~82.4% of the US has seen 1-dose penetration >35%...
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 20%/25%/30% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, 94.4% of US states have seen 20% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 25% of its residents fully vaccinated, this figure is 65.8%. And only 8.3% of US (by state population) have seen 30% of its residents fully vaccinated.

- While 99.1% of US states have seen vaccine penetration >30%, 82.4% of them have seen 1 dose penetration >35% and 48.8% of them have seen 1 dose penetration > 40%.
- 94.4% of the US has at least 20% of its residents fully vaccinated, However, only 65.8% of US has fully vaccinated >25% and 8.3% of US has fully vaccinated >30%.
- This is still a small figure but this figure is rising sharply now.

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

The ratio of vaccinations/ daily confirmed cases is generally trending higher (red line is 7D moving avg) and this is the most encouraging statistic.

- the 7D moving average is about ~45 for the past few days
- this means 45 vaccines dosed for every 1 confirmed case

This figure is rising nicely and likely surges in the coming weeks

In total, about 132 million Americans have received at least 1 dose of a vaccine. This is a good pace and as we noted previously, implies 50% of the population by May.

POINT 3:Tracking "un-restricted" and "restriction-lifted" states
We are changing Point #3 to focus primarily on tracking the lifting of restrictions, as states begin to ease various mandates. Keep in mind, easing/lifting restrictions can take multiple forms:

- easing indoor capacity
- opening theaters, gyms, salons, saloons
- eliminating capacity restrictions
- eliminating mask mandates

So there is a spectrum of approaches. Our team is listing 3 tiers of states and these are shown below.

- states that eased in 2020: AK, OK, MO, FL, TN
- states that eased start 2021 to now: SD, ND, NB, ID, MT, IA, NC, MS, SC, AZ, TX, MD
- states that announced future easing dates: GA, NY, WI, AR, CA, AL, CT

GROUP 1: States that eased restrictions in 2020...
The daily case trends in these states is impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases. Rather, the case trends in these states look like other states.

GROUP 2: States that eased restrictions in 2021 to now...
Similar to the list of states above, the daily case trends in these states are impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases.

- we have previously written about how ND and SD, in particular, have seen an utter obliteration of COVID-19 cases in those states
- that seems to be a function of vaccine penetration + infection penetration, leading to something akin to "herd immunity"

GROUP 3: States that announced plans ease restrictions in 2021...
These states have upcoming dates to ease restrictions. The dates are indicated on each chart. The cases trends in these states have been mostly positive, with perhaps the exception of NY state:

- NY state case levels seem awfully stubborn at these high levels
- weather is improving in NY area, so if weather has any effect on virus transmission, it should slow cases

First Word

COVID-19 UPDATE: Is the "vaccine leg down" starting? US COVID-19 7D delta cases accelerating to downside -- 17,697 vs 7D ago Small-caps (ETF IWM) are experiencing their 13th >5% drawdown since March 2020 (=1 every month)

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