Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

COVID-19 is moving to the northern US states… but overall trends positive
COVID-19 overall remains in retreat in the US, evidenced best by looking at the 7D delta chart below.  And aside from the distortions associated with Labor Day, we see that the delta in cases are consistently negative and thus, pointing to a decline in cases. 

– COVID-19 is impressively improving overall in the US
– and the mix effect of rising cases in the North vs falling in the South is still on balance declining overall
– this is good

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

daily cases could slip under 100,000 per day next week
And on an aggregate basis, the case figures look ready to dip below 100,000 cases per day by sometime next week.  But there is a mix shift taking place:

– cases are declining in the South
– but flu season is starting across the US
– this generally leads to a rise in cases in northern states
– the state-level data is already showing this
– IHME forecasts that overall cases might start to creep up in mid-October due to this effect

So, this could prove to be a temporary reprieve.

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

This chart shows the level of cases (per 1mm residents) and the redder the worse the case impact.  And as you can see:

– the states in the North are seeing the highest cases per capita.
– the states in the North are also seeing the largest 7D increases in new cases (per 1mm residents)

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside
Source: FSInsight

In fact, as shown below, cases are generally falling sharply in states like FL, NC, and SC

– these were states that had a troubling surge in July/August led by the Delta-variant
– it is a key reminder that Delta-variant surge tends to run its course in a community

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

The pace of vaccinations continues to lag in the US and there remains some intransigence.  And it is actually helpful for sport teams, which are widely followed, to potentially have some impact on incenting Americans to be vaccinated.  The NBA, for instance, is now not paying players who are unvaccinated, if they miss games in certain cities/states.  This only applies to games played in cities/states  where such rules exist.  At the moment, it is NYC and San Francisco.

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside
Source: CNBC

As this chart from Kaiser Foundation shows, the vaccination rates by race continue to show a large disparity.  Vaccination rates for Black/Hispanic are trailing that of Whites and Asians broadly.  There are multiple reasons for this from cultural distrust, to healthcare access, but also, many researchers suggest there remains substantial misinformation as well.  In this case, this is where MLB and NBA could improve community awareness.  As the CNBC article above suggests.

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside
Source: Kaiser Foundation

STRATEGY: September was an awful month for stocks
The S&P 500 fell 4.8%in the month of September.  This is the worst month in 2021 (see below) and the worst month since the start of the pandemic. 

– Seasonally, September and October might be weak months (see “all instances” row)
– But during strong years (1H>13%), September should have been more resilient

The weakness in September really emerged in the second half.  While a number of factors likely contributed, it was a combination of:

– an overbought market
– concerns about macro given Delta-variant COVID-19 surge
– geopolitical turmoil given Afghanistan
– Washington dysfunction around debt ceiling and shutdown
– reversals in interest rates and commodities (both higher)
– Fed signaling less dovish commentary
– continued frustrations with supply chain shortages and inflation debate

Overall, it was a month where investors have been forced to decide whether data was half-full or half-empty.

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

Epicenter stocks actually rose in September  — strong argument against “peak everything”
In September, leadership in equities came from Epicenter stocks, aka Cyclicals.  Take a look below:

– Oil & Gas led  +18.44%
– Construction & Engineering  +10.07%
– Hotels  +6.56%

If the US economy was slowing and peak everything is behind us, we do not think Cyclicals would be leading.  In fact, under a slowing growth scenario, one would expect Defensives and Growth to lead, but that was not the case.  In other words, we would urge investors to not get too bearish on the market, despite the weak performance of markets.

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside
Source: Bloomberg

S&P 500 internal correction matches levels seen on September 24, 2020
Jurien Timmer of Fidelity Investments posted this chart earlier this week.  It shows the S&P 500 and the lower half is the % of S&P 500 stocks trading above their respective 50-day moving average:

– Jurien is highlighting that S&P 500 has been in an internal correction for several months now
– and the figure has dipped to a level that shows much of the market is below its 50D

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside
Source: twitter.com

% stocks >50D moving average is now 24.85%, lower than its oversold status on September 24, 2020 (year ago)
As of the close on 9/30/2021, this figure has fallen to 24.85% as shown below.  This chart shows the last 18 months.

– current level of 24.85% is below where it was on 9/24/2020
– stocks were undergoing a large correction in September 2020

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside
Stockcharts.com

Back in September 2020, S&P 500 made its low on 9/24 and rallied 11% in 12 trading days
In fact, the S&P 500 made its low on September 24, 2020.  As the chart below makes clear:

– S&P 500 rallied 11% over 12 trading days
– there was a “retest” later in October, but this was also during the 2020 Presidential election cycle

I don’t think just because there was a retest in 2020, there has to be a retest in 2021.

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

BOTTOM LINE: October 1 is the start of a new quarter.  While there has been significant internal damage, risk/reward still strong into YESeptember was a disappointing month for the S&P 500.  Were equities overdue for some consolidation? Yes, sure.  But we still see positive risk/reward into YE:

– pent-up demand from consumers
– improving confidence of businesses
– COVID-19 remains stable
– boosters being deployed
– investor sentiment negative (AAII) and is a contrarian signal
– market oversold
– seasonals into YE strong (see below)

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

But this also does not mean the downside has been exhausted.  As our Technical Head, Mark Newton, has noted, there remains many internal breakdowns and thus many groups are in downtrends.  Thus, these groups need to reverse higher to confirm a tradable bottom is in place.  

If one wanted to be somewhat half full:

– % stocks >50D is similar to 9/24/2020, and stocks bottomed on that day
– the chart below shows 9/30/2021 low was S&P 500 4,306.24
– this is similar to S&P 500 low early last week of 4,305.91

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

It is a new month, so markets tend to see inflows. And while there are other portfolio balance effects underway, the fourth quarter tends to be seasonally strong. So investors are likely to allocate to equities in the coming months.

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

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

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

Entering October With A “Cluster Of Worries” But Stocks Are So Oversold That We See Reason For Upside

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