The headline: vaccinated people are getting and spreading Delta
This afternoon the CDC announced that a Delta variant outbreak in Massachusetts infected a lot of vaccinated people. The vaccines provided protection against death and hospitalization, but less-than-expected protection against infection and transmission. The disturbing data helps me make sense of reports that over 80 vaccinated people (most of them over the age of 60) died of Covid in Massachusetts over the last couple months, an anomaly in the nationwide data.
Possible winners: vaccine-makers and ecommerce
The report probably bodes well for Moderna and Pfizer, which have been pushing the FDA to approve a third booster shot. Trial data shows that a third shot quintuples antibody counts and may provide additional protection. The FDA has been reluctant to approve a third shot, because it would reduce the availability of first and second shots for the rest of the world. But I'd say that the odds of a third shot getting emergency approval for use in patients over 60 just increased sharply. Ecommerce ETFs like IBUY and KWEB might also outperform for a while as people hunker down again.
Possible losers: everything else
The rest of the stock market is now at real risk, however, as Delta spreads and other states experience outbreaks like we've seen in Massachusetts. The US is about three weeks behind the UK in the spread of Delta, so my guess is we see a sharp increase in new cases for the next couple weeks, and then a peak around August 10. I'd put good odds on a selloff in the next week or two as the numbers worsen and people get pessimistic.
I'm not going short; just taking a break
There are some bullish factors here, so I'm just trimming my holdings, not going full short. Congress is about to pass a trillion-dollar infrastructure bill, and weakening economic data suggests that the Fed will keep rates low and hold off on tapering for the forseeable future. We're also seeing some dollar weakness, which could drive traders out of cash and into equities. I'll probably hold onto my miner stocks as a US dollar hedge. Other than that, I've mostly sold my stocks and will take a little break as we see happens with Delta. Trade safe!
This afternoon the CDC announced that a Delta variant outbreak in Massachusetts infected a lot of vaccinated people. The vaccines provided protection against death and hospitalization, but less-than-expected protection against infection and transmission. The disturbing data helps me make sense of reports that over 80 vaccinated people (most of them over the age of 60) died of Covid in Massachusetts over the last couple months, an anomaly in the nationwide data.
Possible winners: vaccine-makers and ecommerce
The report probably bodes well for Moderna and Pfizer, which have been pushing the FDA to approve a third booster shot. Trial data shows that a third shot quintuples antibody counts and may provide additional protection. The FDA has been reluctant to approve a third shot, because it would reduce the availability of first and second shots for the rest of the world. But I'd say that the odds of a third shot getting emergency approval for use in patients over 60 just increased sharply. Ecommerce ETFs like IBUY and KWEB might also outperform for a while as people hunker down again.
Possible losers: everything else
The rest of the stock market is now at real risk, however, as Delta spreads and other states experience outbreaks like we've seen in Massachusetts. The US is about three weeks behind the UK in the spread of Delta, so my guess is we see a sharp increase in new cases for the next couple weeks, and then a peak around August 10. I'd put good odds on a selloff in the next week or two as the numbers worsen and people get pessimistic.
I'm not going short; just taking a break
There are some bullish factors here, so I'm just trimming my holdings, not going full short. Congress is about to pass a trillion-dollar infrastructure bill, and weakening economic data suggests that the Fed will keep rates low and hold off on tapering for the forseeable future. We're also seeing some dollar weakness, which could drive traders out of cash and into equities. I'll probably hold onto my miner stocks as a US dollar hedge. Other than that, I've mostly sold my stocks and will take a little break as we see happens with Delta. Trade safe!
Note
Another interesting thing to note is that the debt ceiling goes back into effect tomorrow. This probably means no new stimulus coming down the pipe after the infrastructure bill.It may also mean an end to the run up in bond prices and collapse in bond rates that we've seen since March. As I understand it, the US Treasury needed to pay down a trillion dollars of T-bills before the debt ceiling went back into effect, so it has been doing that for the last couple months. This means that money market funds that would ordinarily be invested in T-bills are suddenly flush with cash and need to park it in a short-term investment somewhere.
They've mostly been putting it in reverse repo, which is why reverse repo demand hit a trillion dollars today and could hit 2 trillion by the end of the year. But some of that money is also going into short-term bonds. In fact, the whole reason the Fed raised the reverse repo rate to 0.05% last month was to keep short-term bond rates from falling any lower than that.
As the debt ceiling goes back into effect tomorrow and Treasury completes its effort to get of the last of its cash, we may see bond demand stabilize, prices fall, and rates rise a little bit. On the other hand, the supply of new bonds will also be limited by the debt ceiling, so maybe not? If rates do rise at all, it would probably be bearish for stocks, especially tech.
This is one of those times I wish I knew more about bonds.
Note
A few things to note as the weekend comes to a close:1) The eviction moratorium quietly expired yesterday, with 1 in 6 US renters at risk of eviction. I consider that short-term bearish, long-term bullish for housing. I expect we'll see some easing of the inventory shortage, and perhaps even some easing of prices.
2) That Congress allowed the eviction ban to expire suggests they may do the same for the student loan deferment, set to expire September 30. That'll suck an awful lot of cash out of consumers' pockets.
3) The Citi Economic Surprise Index quietly turned negative this week, and the Inflation Surprise Index continues to climb. The ECRI Weekly Leading Index is down more than half from its peak. If it continues to fall at this rate, it will turn negative by end of year.
4) Sentiment seems positive this weekend, and futures have opened green. The CDC's release on Friday has gotten almost no traction on social media. I'm seeing people wearing masks at stores, but no sign that they're reducing economic activity otherwise.
5) August is one of the weaker months of the year, and September is an especially brutal month in seasonal terms. Note this season-cycle composite posted by Callum Thomas on Twitter: twitter.com/Callum_Thomas/status/1421598698702721026. Despite positive sentiment, we're entering a very risky time of year.
I still plan to take a break for a few months.
Note
Despite the public's relative disinterest in Delta variant news so far, the risk of lockdowns or other economically adverse policy decisions will be elevated until this wave peaks.Note
There's a large divergence between the survey and hard data components of the Citi Economic Surprise Index. The former is mildly positive, while the latter is in deep negative territory. This suggests that either the market is underestimating how much the economic situation has deteriorated, or investors are confident of effective government support. Last week, a 2% GDP miss passed largely without comment. Any other year, that would be huge news.Note
Rather significant intraday reversal. Friday I made the bear case based on fundamentals, but there's a technical case to be made, too. Bearish RSI divergence on SPY:VIX in a ST uptrend (within its LT downward wedge) despite gains in SPY:
Note
Note that today's SPY candle was a bearish engulfing.Note
Stocks moved higher today on news that the Dems have found a way to extend the eviction ban after all. Now effective through October 3. The ostensible goal is to allow time for state and local governments to distribute $42 billion in rent relief money, though they don't seem to have a plan for how to get that money in the hands of renters. Not much of an exit strategy here. Anyway, looks like expiry of pandemic relief measures has been postponed and will next come to a head at the end of September.Note
Highlights from the CDC's report:* The typical person with seasonal flu will transmit it to just over 1 person on average.
* The typical person with O.G. Covid will transmit it to 1.5 - 3.5 people on average.
* The typical person with Delta variant will transmit it to 5 - 9.5 people on average.
Vaccine effectiveness against previous strains:
* 8-fold reduction in chance of infection
* 25-fold reduction in chance of hospitalization/death
Vaccine effectiveness against Delta:
* 3-fold reduction in chance of infection
* 10-fold reduction in chance of hospitalization/death
Note
The first peer-reviewed paper on vaccine effectiveness against Delta shows that Pfizer is about 93% effective against Alpha and 88% effective against Delta. That's not a huge reduction, so that's positive news. Morgan Stanley raised its end-of-year price targets for 2021 and 2022 today, seemingly on the expectation that Democrats will continue stimulus and easy monetary policy. VIX has broken its uptrend.On the whole, we seem to be getting a bit of a green light for the month of August, at least. I am back in the market (albeit with a smaller position than I had in July).
Note
My break was much shorter than I thought it would be. :)That's how it goes sometimes. The news environment moves fast.
Still watching the Delta situation closely, though.
Note
Last week there was a virtual media blackout around the debt ceiling, but this week it's getting some real attention, with Mitch McConnell threatening to block efforts to raise it. This could lead to a government shutdown in October if the ceiling isn't raised. More and more, October 1 is looking like the date when the apocalypse comes. We could still see some anticipatory selling over the next two months. Major indexes are at multi-decade channel tops.
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.