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Members Area First Word COVID-19 UPDATE: Post-Georgia run-o�, VIX should fall = risk-o

First Word

COVID-19 UPDATE: Post-Georgia run-o�, VIXshould fall = risk-on. UK variant seems to bemore contagious for 20-year oldsJanuary 6

Tom LeeHEAD OF RESEARCH

Click HERE to access the FSInsight COVID-19 Daily Chartbook.

STRATEGY: Post-Georgia Senate run-o�, VIX should fall = risk-on stocksEquities staged a decent bounce Tuesday, even as the Georgia Senate run-o�elections were not yet decided. The consensus seems to believe that if Dems win bothseats, this is negative for stocks because of the risk of higher taxes. But marketexpectations about election outcome are not really reliable. I don’t know the future,but to me, the “uncertainty” of the election is arguably a bigger overhang than theactual outcome. Moreover, check out the comments from Tom Block, Fundstrat’s Headof Policy Strategy below regarding the impact of a Dem sweep in Georgia:

– he doubts Congress pass higher capital gains taxes (perhaps corporate) and a heavyconservative bent remains in the Senate

Source: CNBC and Fundstrat

But we think the bigger implication is that this “uncertainty” is lifted from markets. Takea look at the VIX below and you can see we have seen a 30 level on Monday and a 33the week prior. These are extremely elevated levels. And the question we should askis whether the VIX will remain elevated post-Senate outcome.

– I think the VIX is likely to resume its downward trend, and potentially fall below 20– a decline below 20 would likely create inflows from systematic and leveragedinvestors– this equals risk-on

Source: Bloomberg

So we think stocks will resume their upward bias in the coming weeks, and movetowards S&P 500 4,000 by Feb-April timeframe (see our 2021 outlook for the rationale). And we continue to favor OW (overweight) the Epicenter sectors. Our top 3 remain:

– Consumer Discretionary– Energy– Industrials

And the rationale is described below. Of these, the least intuitive is Energy. But as wecommented a few times recently, we think the sector has been so obliterated, thateven a modicum of decent news would lead to positive equity price gains.

Source: Fundstrat

Energy historically stage large rebounds after 5-year slumps… does not mean this has to

happen in 2021… but it could

Yesterday, we shared this chart created by our data science team, led by tireless Ken,which plotted the precedent Energy bear markets (vs S&P 500) since 1920. These are allplotted below. And the dramatic nature of the current decline becomes even moreapparent:– Since 2015, Energy has underperformed the S&P 500 by ~8,000bp– This is the worst ever 5-year stretch of underperformance– The next worst was 1957-1960, and Energy underperformed by ~5,500bp

Source: Fundstrat and FAMA and Bloomberg

Energy post-slump: the bigger the decline, the bigger the rebound…

Take a look at the 24-month forward relative return of Energy stocks after each of theidentified slumps. The forward 24-month returns have been tremendous.

– the larger the slump, the larger the subsequent rebound– the 2015-2020 slump is “o� the charts” bad

Granted, this does not mean Energy has to rebound in 2021.

Source: Fundstrat and FAMA and Bloomberg

But we also think the set-up is very favorable — less bad news here = good news. As wediscussed in our 2021 Outlook, Energy seems to be a sector where the supply anddemand dynamics become structurally a lot more favorable in 2021:

– US future supply will be constrained by a Democratic White House– Financial capital will be constrained as private equity will not bail out the sector ala2016– Demand will recover given the US economy is starting a new expansion

So you can see how this supply/demand alignment might be one of the mostfavorable for several decades.

Energy TRIFECTA (*): 9 stocks that our three macro teams like…

Below are the 9 stocks that are the Energy trifecta — rated OW by each of the 3 macroteams. – HP– NOV– SLB– EOG– PXD– HFC– MPC– PSX– XEC

Source: Fundstrat

(*) These 9 Energy Trifecta stock ideas are the subset of the “Epicenter” Trifecta stock list

we published on December 11th, 2020. To view the full list of stock idea, 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

o� 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.

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), Sluymer (Technicals)

– Biden vs Trump –> based on correlation to either candidate odds

Granny Shots:Full stock list here –> Click hereTickers: AAPL, AMZN, AXP, BF.B, CSCO, EBAY, GOOG, GRMN, GWW, INTC, KLAC, LEN,LOW, MNST, MSFT, MXIM, NVDA, OMC, PM, PYPL, QCOM, TSLA, XLNX

Trifecta Epicenter (*):Full stock list here –> Click hereTickers: AN, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, HAS, MAT, PII, MGM, HLT, MAR,NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY, FITB, WTFC,ASB, BOH, FHN, FNB, PB, PBCT, RF, STL, TFC, WBS, PNFP, SBNY, NYCB, MTG, AGNC, EVR,IBKR, VIRT, BK, STT, SYF, BHF, AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, MMM,IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER,UHAL, HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC, LYB, EXP, MLM, CF, MOS, ESI, NEU,NUE, RS, SON, STOR, HIW, CPT, UDR, KIM, NNN, VNO, JBGS, RYN

Biden White House vs. Trump White House: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 o� 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 cases 206,630, +18,635 vs 7D ago –> still holiday distortionsThe latest COVID-19 daily cases came in at 206,630, up +18,635 vs 7D ago. – the holiday e�ect is going to cause distortions for several weeks– over Thanksgiving, it was not until a full two weeks after Thanksgiving that underlyingtrends were visible– this will be the case with current data, meaning mid-Jan is when we can start to geta better handle on trends

Source: COVID-19 Tracking Project and Fundstrat

The 7D delta turned positive, but this 7D delta is improved versus the last few days– because of holiday scheduled closures/etc, distortions in the data will be prevalentuntil mid-Jan– so I would look at trends with a grain of salt

Source: COVID-19 Tracking and Fundstrat

Source: COVID-19 Tracking and Fundstrat

https://cdn.fsinsight.com/wp-content/uploads/2021/01/covid-19-update-post-georgia-run-off-vix-should-fall-10.png

Source: COVID-19 Tracking and Fundstrat

POINT 2: COVID-19 getting worse in NYC and FL, but really slowing in WIINSUThere has been a lot of reports of dense crowds in FL over the holidays and as such,this raises the risk of a rise in cases in FL. Take a look at the 3 larger counties in FL andyou can see the surge in daily cases over the past few weeks.

– but more notably, see the surge in the past week?– this is the holiday spike

Source: Johns Hopkins and Fundstrat

On the other hand, take a look at the states that early were at the heart of Wave 3 —WI, IL, ID, ND, SD and UT, or WIINSU. – see how dramatically cases have collapsed in these states?– this even as mitigation measures in these 6 states was arguably largely nominal

Does this again point to the idea that these states could be closer to herd immunity?– plus many of these states have been among the most aggressive in administeringthe vaccine

It bears watching

Source: Johns Hopkins and Fundstrat

POINT 3: London cases exploding and is UK variant more contagious to 20 year-olds?We have been wondering whether we would see a unique surge in UK cases, sincereports of this new potentially more transmissible UK variant first emerged. Take a lookbelow and see the daily cases per 1mm in various global cities– Most of Europe has seen a hard rollover of cases– But London cases are absolutely exploding

Source: Johns Hopkins and Fundstrat

The Imperial College has a pre-print study out regarding this new UK variant (referredto as VOC). We shared the preprint link below.

https://www.imperial.ac.uk/media/imperial-college/medicine/mrc-gida/2020-12-31-COVID19-Report-42-Preprint-VOC.pdf

The takeaway seems to be that more under 20-year olds are catching COVID-19. It isnot exactly clear to me why but this does not bode well for the rest of the world if thisis the case. As the surge in London cases could be a precursor to what we seeelsewhere.

– but does this make me more pessimistic?– ultimately, if the vaccine is e�ective against this strain, I don’t know if this reallychanges anything

https://www.imperial.ac.uk/media/imperial-college/medicine/mrc-gida/2020-12-31-COVID19-Report-42-Preprint-VOC.pdf

Tom LeeHEAD OF RESEARCH

Disclosures (show)