Dr. Anthony Fauci gave his first President of the Biden administration. He preliminarily confirmed what tireless Ken’s data has been showing; that the virus appears to be ‘plateauing ‘ in the United States. This confirms what tireless Ken’s data has been showing. We have also had a significant period of consecutive declines in daily cases. Unfortunately, the new mutations that have been identified in South Africa and Brazil appear to reduce the effectiveness of monoclonal antibodies, which therefore reduce the effectiveness of current vaccines. It is yet unclear if the effectiveness of the vaccines is reduced enough to render them ineffective against the strains. On the bright-side, Fauci mentioned that the new vaccine platforms can be easily adjusted to target new strains.

This press conference was cautiously optimistic. Even in the face of these mutations, the US strategy of rolling out vaccines and mitigation still makes sense. And with the executive orders by the White House, among them, expediting production and supply of COVID-19 materials plus mask mandates in Federal buildings, the focus remains on mitigation in addition to vaccination. The mutations make the vaccination program all-the-more urgent as the less the virus is reproducing, the less it can mutate further.

COVID-19 In Retreat and Multiple ‘Risk-On’ Signals

COVID-19 cases are decisively turning lower in the United States as a whole. We’re not sure what’s exactly causing this. Vaccinations could be working in tandem with lockdowns but one discrepancy we find in the data highlights the ongoing mysteriousness of this perplexing virus. Strangely, states with ‘zero lockdowns’ saw COVID-19 peak in November and December. Yet, CA, which had a strict mask mandate and among the most restrictive lockdown measures, saw cases surge through November and December and even now the cases their have not receded as quickly as the ‘zero lockdown’ states of North Dakota, South Dakota and Florida.

STRATEGY: Rally in HY + Fall in VIX + COVID-19 retreat= Market More Risk-On Than Consensus

The gains in equity market in the past week were led by Technology, while Energy, which had been leading, declined sharply. Quite a number of our client s mentioned the relatively attractive risk/reward of Technology given the recent underperformance as well as the strong 4Q2020 results reported by some of these companies like Netflix and Intel. Their outperformance was an understandable catalyst for relative performance. However, we do not think the market is becoming ‘defensive’ as leadership by Tech can sometimes indicate. HY Credit is rallying, the VIX is falling, COVID is moving in the right direction and it looks as if vaccinations are picking up.

COVID-19 In Retreat and Multiple ‘Risk-On’ Signals

HY bonds generally marches higher basically every day, including Thursday when the VIX simultaneously fell. So, even though Thursday may have seemed like a weak day on its face since cyclicals got pounded and small-caps sold off the ‘leading indicators’ in the adjacent markets of credit and derivatives suggested strength.

This leads us to believe that the recovery in technology is healthy and justified. Despite the adverse market action on Thursday the forward-looking indicators are suggesting that the market will soon shift to a more ‘risk-on’ sentiment that should reward investors who are OW small-caps and epicenter stocks.

We are currently seeing the strongest string of declines (7D delta) that was not seen since Wave 2 ended over the Summer. This is undoubtedly a big downturn which lends itself to the natural question of whether this is a sustained downturn that will lead us to a robust recovery, or will the mutant strains reverse progress significantly?

We have long talked about how lags in the data can occur in an adverse way, like when there is a ‘catch-up period’ after holidays. It is also possible that the ‘real trend’ in COVID-19 cases could be more positive than what we are observing. If this is the case this would be very supportive for epicenter stocks.

Based on the vaccine data we are seeing, it looks as though significant progress is being made. The efforts of the new administration certainly seem on their face as if they will continue the progress already made.

COVID-19 In Retreat and Multiple ‘Risk-On’ Signals

Bottom Line: We are seeing some of the strongest evidence since the virus began that it is in full-blown retreat. The HY debt markets and VIX also lead us to believe that the market could be setting up for a significantly more ‘risk-on’ sentiment than general consensus perceives.

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

COVID-19 In Retreat and Multiple ‘Risk-On’ Signals

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

COVID-19 In Retreat and Multiple ‘Risk-On’ Signals

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