Case Trends Positive, Market-Chop Hides Cyclical Rotation
Daily cases continue to show improvement, but the pace has slowed somewhat. As you can see below, the figures are still lower than a week ago, but at a slower pace. In the past week, there has been a pick up in cases in AZ, NJ, DE, MI and MA. But these rises coupled with stubborn case levels in FL and NY keep this from showing faster improvement.
The 7D delta in daily cases has now been negative for 14 consecutive days As you’ll recall it was negative for 40 plus days and then likely spiked due to testing distortions caused by the destructive cold snap that hit the country weeks ago. US hospitalization rates are still rolling over.
Vaccination progress continues steadily, and the President’s announcement last night of making vaccinations available for adults by May 1st is a major positive for markets. Many people had doubted the original timeline and now we are significantly ahead of schedule. This is incredibly bullish for markets and is a scenario that exceeds what consensus expectations were if it can be pulled off. A goal of a semblance of normalcy around Independence Day is a big deal and means the White House is going to focus on getting buy in from governors and mayors to achieve this target. Given the skepticism we find among investors regarding a reasonable chance to return to normalcy, if the White House aim for this, it is a positive surprise for consensus thinking.
There was a 10% increase in average weekly vaccinations, up to 2.2 million from 2 million last week. Overall, 10% of the US population is fully vaccinated and 19.1% have received their initial dose. Half of US states have now achieved the significant 60% level or combined vaccinations and infections that is presumable approaching herd immunity. However, these states are concentrated in the least populous of the fifty, so we have reached a total vaccination + infection level in the United States of around 26.5%. Importantly, the amount of vaccinated compared to new cases has been above 40 to 1.
Furthermore, states have begun lifting impediments to commerce. Many states have been easing indoor capacity, opening theaters, salons and saloons. Capacity restrictions are being lifted as well as mask mandates.
STRATEGY: S&P 500 breaks to all-time high on Thursday, next stop, another +10% rise before next possible ‘correction’
The most significant market development this week, in our view, is the upside breakout of the S&P 500. Upside breakouts matter, representing a significant development in the price levels for equities. Upside breakout ends the ‘consolidation’ that has been occurring since mid-February. Even more impressively this breakout is occurring under a backdrop of ‘rate-mageddon’ that led to recent weakness. The underlying concerns still exist, yet markets continue higher. We also see the collapse of the VIX to levels only mildly above recent lows as confirming our thesis.
Why is this a big deal? Because Upside ‘breakouts’ have been followed by a 10% rally in S&P 500. So you might wonder, well, it is only a modest ‘breakout’ and what does it all mean? Take a look at the S&P 500 over the past year, and we marked some key points.
The S&P 500 has seen 3 consolidations last year.
- 6/6/20-7/18/20 – post breakout 11% rally
- 9/2/20-11/9/20-post breakout 10% rally
- 2/16-NOW +10% Rally? YES, we think so!
So, our base case is a 10% plus rally following the recent breakout. Remember how scary the last few weeks were? Those with patient hands are happy today. We think there are fundamental underpinnings to the coming upside action. COVID-19 could be retreating faster than perceived, pent-up demand could be greater than expected, operating leverage could surprise to the upside as well, interest rates could stabilize and the general cautious positioning of investors is a contrarian positive. Climb on wall of worry, fall on slope of hope! All of these potential upside risks are potential drivers for the coming the rally.
While we are advocating ‘Epicenter’ as having the best risk/reward we are very heartened to see Technology recover. The Epicenter cadre of stocks have rallied despite the latest market turmoil over rate and inflation fears. It rallied even as the broader index was driven down 6% by Technology. Epicenter also outpaced Growth in the bounceback that occurred. Our Head of Portfolio Strategy Brian Rauscher upgraded Energy and Financials last week.
Last Friday, we flagged to our clients that Technology was making 1H2021 lows. The rally this week seems to validate this view and it is a big deal since Technology is 30% of the S&P 500. This is why the bounceback in Tech is such a positive thing. It helps pave the way for the Index to start moving toward that 4,300 level.
Bottom Line: We see a +10% move to the S&P 500 to 4,300, but we do expect a jagged path over the next 7-10 days. We anticipate markets will remain relatively flat in this period as they ‘catch their breath’. Just in time for Spring Break!
As a reminder tireless Ken and I will be on vacation next week!
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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