Vaccine “lotteries” appear to be incentivizing vaccinations and are gaining favor in several states. States have been trying to boost vaccine adoption after a recent slow-down. Given that vaccines are being shown to be effective, increasing vaccine penetration boosts the overall immunity of a community. Ohio was the first when they announced their “vax-a-million” on May 13th. And it has been a runaway success. In just the first week, vaccines have increased by 28%! Five other states have joined including California, New York, Maryland, Oregon and Colorado.

There is thankfully good news from India on COVID-19. The imperiled nation is showing demonstrable progress in cases rolling over and they are now down 50% from the peak. This is removing one of the major sources of tail-risk for the global economy; that India and it’s massive economy would again be brought to a standstill by COVID-19. Ten of ten regions in India are now rolling over.

Energy Stocks Have Major Implied Upside, Sideline Cash Grows

The latest COVID-19 daily cases came in at 21,241 which was down -6,380 from a week ago. The US continues to see a persistent decline in daily cases that is likely largely due vaccine penetration. The chart below clearly shows the waterfall decline over the past 5 weeks- more specifically compared to 5 weeks ago, the daily cases in the US has decreased by approximately 60%. We believe the decline will persist because of what is looking like durable immunity provided by vaccines.

Energy Stocks Have Major Implied Upside, Sideline Cash Grows

The US continues to see a steady decline in daily cases. The 7D delta has been negative over the past 6 weeks. Over the past week, the 7D delta has been stable at negative 7,000 per day. If this speed of decline persists, we could potentially see the daily case figure drop below the level of 10,000 this Sunday.

Other metrics continue to show a welcome collapse in COVID-19. Current hospitalization and positivity rates are at an all time low. Daily deaths are set to hit a new all-time low likely sometime next week. There are well over a dozen states that have reached or are very near the combined level of immunity reaching 70%. Gradually the US is moving toward that threshold of presumable herd immunity. So long as a vaccine resistant variant doesn’t spread widely, the continued retreat of cases should persist. There were around one and a half million vaccines administered on Thursday which was down 28% compared with 7D ago. The lotteries will hopefully help the declining rate of vaccinations and expedite reopening.

STRATEGY: Energy Has Posted Positive Gains Every Single Month in 2021. Tech Falls on Slope of Hope

As May comes to a close, we thought it would be helpful to look at the composition of market performance in May. A few things stood out. The interest rates weren’t only subdued but fell in May by 2 bp. Despite lower rates Technology continued to be weak in May. However, strength in Epicenter sectors helped keep the index positive. I think Tech is falling not because of inflation fears, I think it is falling because the trade is so ‘crowded.’

Energy and Financials were among the best performing sectors in May and are rising despite falling interest rates which shows strength. These sectors are thus not rising due to inflation it seems. Why are institutional investors still underweight Energy? We are nearly halfway through the year and Energy has been up every month.

Energy Stocks Have Major Implied Upside, Sideline Cash Grows

WTI Crude also broke out to the upside which we view as positive. It looks like markets have largely shrugged off the issue of the Iran surplus like we thought they would. The next key level we would like to see WTI break is $67.98. This further strengthens the case for Energy stocks ( XLE 0.24% ,  OIH 0.65% ) to catch up to oil and get more in line with their historical correlations. The thing is the price of oil doesn’t even have to rise for significant upside to still be implied. Currently, the upside for XLE implied by the current price of oil is about 24%. For OIH it is significantly more at 45%. We think there’s a high chance Energy could go significantly higher, in which case the implied upside would also be higher for these two ETFs.

The case for Energy is strong. The supply/demand outlook is the best it has been for the industry in fifteen years. There is major demand upside as the economy recovers and particularly as the demand for things like jet fuel returns to normal levels. Oil appears to be breaking out to the upside and Energy stocks have largely trailed this move. Nonetheless, Energy stocks have risen every single month. We think there’s a lot more wind in the sails of the Energy trade left in 2021.

Yest most institutional investors are underweight Energy. If you cannot get the gist of our message, we’ll be more candid. We are urging investors to make a large over-sized bet in Energy before what we feel will be an inevitable rush into the sector for investors chasing the best returns in the market.

There is a ton of money on the upside which we think could be fuel for an explosive move upward. Institutional cash on the sidelines keeps building. Just this last week another $69 billion was added and the $3.167 tn on the sidelines is just short of the May 2020 $3.2 tn record. Investors are getting cautious and their historically high purchases of downside protections, like we highlighted in the Russell 2000 last week, are fuel for continued upward moves.

Hence we see still see the S&P 500 reach 4,400 by mid-year and our tactical buy call for the  IWM 0.37%  is still intact. Lastly, the VIX is crashing. It closed Friday below $17. Risk on!

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

Energy Stocks Have Major Implied Upside, Sideline Cash Grows

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

Energy Stocks Have Major Implied Upside, Sideline Cash Grows

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