Good news, bad news about a second wave

Mid-week market update: I have some good news, and bad news about a second wave. The bad news is new case counts are rising dramatically in the US. The good news is fatalities are not rising.


Here is some more bad news. Marketwatch reported that Dr. Anthony Fauci, head of infectious diseases at the National Institute of Health, said that “We are still in the middle of the first wave. So before you start talking about what a second wave is, what we’d like to do is get this outbreak under control over the next couple of months.”

For investors, this matters for a couple of reasons.

Explaining the falling fatality rate

The falling fatality rate seems to be a puzzle, at first glance. Consider the more problematical states where new cases have been rising.


Even in those states, death rates have been mostly flat, except for Texas. The death rate in Texas has been rising slowly, but they have not spiked in line with the new case rate.


One possible explanation can be found from the Florida data. The median age of COVID-19 patients have been falling dramatically. Since the young tend to have fewer vulnerable conditions, their survival rate is higher than an older population.


That’s the good news. The bad news is COVID-19 survivors are often saddled with chronic health conditions, which will be a long-term drag to productivity, and those people will be a burden to the healthcare system for years to come. Moreover, they will face higher cost for medical insurance because of their pre-existing conditions. That said, hospitalizations in a number of the surge states are rising dramatically. Here is Arizona.


Here is Texas.


A second economic wave

The pandemic is unquestionably a human tragedy, but what matters to investors is the outlook for economic growth and corporate earnings. How would a second pandemic wave affect the economy?

Most of the surge states are under the control of Republican state governments, which have shown great reluctance to shut down their economies again. While the authorities may not necessarily want to reimpose stay-at-home orders, local economies may still slow because of individuals choosing to stay home.

Trump’s less than full capacity at his Tulsa rally serves as a useful case study. The Tulsa fire marshal attendee count was just under 6,200 attendees in an indoor stadium with a capacity of 19,000, and when the campaign touted that it had expressions of interest from over a million people for tickets. From an investor’s point of view, the most bullish explanation is a swarm of youth coordinating on TikTok overwhelmed the booking system with ticket requests. The NY Times reported that Trump campaign managers Brad Pascale attributed the low turnout to the media instead of “leftists and online trolls”.

“Leftists and online trolls doing a victory lap, thinking they somehow impacted rally attendance, don’t know what they’re talking about or how our rallies work,” Mr. Parscale said. “Registering for a rally means you’ve RSVP’d with a cellphone number and we constantly weed out bogus numbers, as we did with tens of thousands at the Tulsa rally, in calculating our possible attendee pool.”

Instead, he blamed the news media for the low turnout.

“The fact is that a week’s worth of the fake news media warning people away from the rally because of Covid and protesters, coupled with recent images of American cities on fire, had a real impact on people bringing their families and children to the rally,” he said.

The most bearish explanation is that die-hard Trump supporters, who tend to be skeptical that COVID-19 poses a threat to themselves, decided that it was not worth the risk to travel to Tulsa for the rally. If such a dedicated group turns out to be so risk-averse that they won’t attend a rally featuring their hero, what does that tell us about the prospect for reopening the economy in the face of such skittishness?

The Open Table data for Houston serves as a cautionary tale for bulls who are enthusiastic about a V-shaped recovery. For some context, the Houston Chronicle reported that 40 Houston restaurants have closed temporarily because some staff had tested positive for COVID-19.


IHS Markit’s US June Services PMI printed at 46.7, which missed expectations of 48, and the reading was below 50 indicating contraction. The services economy dwarfs manufacturing, and further weakness are signaling an anemic recovery.


Small businesses are especially vulnerable to the slowdown. As the chart below shows, revenue growth has stalled after the initial gains from reopening.


Their cash buffers are low.


They are important to the economy. Small businesses with less than 500 workers employ 47% of total workers, and cover 40% of total payroll.


Jerome Powell showed concern in his Senate testimony last week that “the longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures”. That’s precisely the scenario that the American economy is facing should the pandemic force a second round of shutdowns, either by edict, or by individuals choosing to avoid interaction with the public.

Any further slowdown is likely to spark another round of layoffs. Here are some estimates of the jobs most at risk in a second wave. While the first wave of job losses were concentrated among low-paid workers, the second wave is likely to affect better paid white-collar workers. The top five on list are admin and support services, professional, scientific, and technical services, wholesale trade, education, and insurance. All of these industries tend to be much better paying than the restaurants and hospitality job layoffs of the first wave.


For investors, that’s the true downside risk represented by a second wave.

Internals are still weak

Looking towards Wall Street, the market continues to chop sideways this week. The “island” of the island reversal is acting as if it’s surrounded by a moat. While the bulls have been unable to rally to close the gap and rally the market to the island, the bears haven’t been able to seize control of the tape either. The hourly chart shows a second bearish island reversal, which is an interesting formation that I haven’t seen before.


Many of the internals that I have been monitoring are still exhibiting negative divergences. The high beta to low volatility ratio is still falling, indicating a reduced equity risk appetite.


The reopening pairs are also pointing south. Both the global pair (global airlines to Chinese healthcare) and the US pair (Leisure and entertainment to healthcare) are declining. If the market is getting excited about a reopening sparked V-shaped recovery, these factors are certainly not showing much signs of enthusiasm.


As well, the relative price performance of high yield, or junk, bonds relative to their duration-adjusted Treasuries is also flashing a minor but persistent negative divergence, which is a signal of unenthusiastic credit market risk appetite.


As we approach quarter-end, Market Ear reported estimates of re-balancing required for portfolios to return to their target allocations. All estimates involve the sale of equities, though not all of the sales will be US equities.

Key points via JPM, according to us, the best on the street when it comes to estimating these flows.

“we estimate around -$70bn of negative equity rebalancing flow by balanced mutual funds globally into the current month end….

we estimate that the pending equity rebalancing flow by US defined benefit pension funds into the current quarter end is likely modestly negative at around -$65bn….

Norges Bank into the current quarter end is likely modestly negative at around -$10bn….

SNB to sell around $15bn of equities given the recovery from March lows…

GPIF into the current quarter end is likely negative at around $25bn…created a need for negative rebalancing flow, i.e. equity selling, of around $170bn into the current month/quarter end. This $170bn should be thought of as an upper estimate as it is possible that same of this equity selling was done before quarter end.”

My inner trader is bearish, but positioning is light. He will not become an enthusiastic bear until the market break down out of the rising channel, and that break should coincide with a violation of the 200 day moving average.


The 3020 level will be a key test for both the bulls and the bears. I wrote in the past (see An island reversal update) that the minimum target for the (first) bearish island reversal is about 3020, which is also the level of the 200 dma. Expect the bulls to try to make a stand to defend that level, but the market overran the bullish island reversal target in March to levels much higher than the minimum target. Keep an open mind about the outcome.

Disclosure: Long SPXU


55 thoughts on “Good news, bad news about a second wave

  1. Are we on the precipice of a major decline or a garden variety pull back?
    A duel between ‘lives’ and ‘livelihoods’. Playbook is known as risks become elevated to ‘lives’. Is it temporary or a slide into abyss? I think temporary.
    A market pullback will be healthy.

  2. The real good news is that it isn’t the Death “Rate” that continues to decline but the Actual Number of Deaths from Covid that are in decline.

  3. I really have no idea on how to interpret people’s behavior at the moment.

    On one hand we have very low turn out at Trump’s rally (possibly due to covid and media, I am suspicious of the tiktok narrative, seems far fetched for 1M ticket vs 6200 attendee, also 7M viewers).

    On the other hand, Ukarlewitz tweeted Chase consumer card tracker the other day:

    Maybe consumers are spending some money but are also not travelling?

    1. I think that is right but notice that the Chase chart is still about 11% lower than March 1st.

      1. As the fiscal stimulus runs out, will the spending continue its trajectory?
        Talks are on about another stimulus to keep it going at least through elections.

  4. When so much is unknown about the disease, the following statement above struck a discordant chord.

    The bad news is COVID-19 survivors are often saddled with chronic health conditions, which will be a long-term drag to productivity, and those people will be a burden to the healthcare system for years to come. Moreover, they will face higher cost for medical insurance because of their pre-existing conditions.

    It is a disease in it’s infancy!!

    1. Agree. I suppose we could just as easily say ‘The bad news is [smokers/ type II diabetics/ individuals with sedentary lifestyles and/or unhealthy diets or who practice unsafe sex] are often saddled with chronic health conditions, which will be a long-term drag to productivity, and those people will be a burden to the healthcare system for years to come. Moreover, they will face higher cost for medical insurance because of their pre-existing conditions.’

      It’s possible that COVID-19 survivors will one day make the top ten list, but I just don’t see it.

  5. Cam or anyone else,

    I have seen some news here-and-there about the Covid-19 survivors but nothing definitive. Can you point me to a good article or a study.


    “The bad news is COVID-19 survivors are often saddled with chronic health conditions, which will be a long-term drag to productivity, and those people will be a burden to the healthcare system for years to come.”

      1. Thanks for saving me from looking up the answer. Bloomberg also reported that a vaccine may not necessarily prevent infection, just mitigate the worst effects of the virus. We may need to see several versions of vaccines before we actually get one that prevents infection.

        Although a knock-out blow against the virus is the ultimate goal, early vaccines may come with limitations on what they can deliver, according to Robin Shattock, an Imperial College London professor leading development of an experimental shot.

        “Is that protection against infection?” Shattock said. “Is it protection against illness? Is it protection against severe disease? It’s quite possible a vaccine that only protects against severe disease would be very useful.”

        At least one of the fastest-moving experimental shots has already advanced into human trials after showing an impact on severe disease — but less so on infection — in animals. Experts say such a product would probably be widely used if approved, even if that’s as much as it contributes, until a more effective version comes to market.

        “Vaccines need to protect against disease, not necessarily infection,” said Dennis Burton, an immunologist and vaccine researcher at Scripps Research in La Jolla, California.

        Still Susceptible

        There are drawbacks, though. While holding the potential to save lives, such vaccines might lead to complacency in lockdown-weary nations, said Michael Kinch, a drug development expert who is associate vice chancellor at Washington University in St. Louis.

        “My guess would be that the day after someone gets immunized, they’re going to think, ‘I can go back to normal. Everything will be fine,’” he said. “They’re not going to necessarily realize that they might still be susceptible to infection.”

        1. Taiwan’s practice may give us some idea on how to enhance our immune system in fighting against this virus. Pretty much everyone has a yearly flu shot (kids get it for free) , and many people have pneumonia vac shot (free for people over 50).

          Over there the infection rate is very low and fatality rate is negligible. One of my friends teaching at NTU medical school has done some analysis and found that correlation is meaningful. The main concept is that together these two shots give our immune system exposure to other types of coronavirus and develop immunity to them. The genetic makeup of the shots has a very high overlap with this COVID19’s. So we have a partial immunity to COVID19. That makes it harder to be infected, and less severity in the event of infection. That being said, now people in Taiwan start to get complacent. We will see if second wave makes a big comeback there. Surprisingly Japan gets it under control very well, contrary to everyone’s prediction, although it is a little like small-scale whacking-a-mole. Their homegrown flu/cold medicine really is effective.

          1. Ingjiunn, are you saying that the combination of the annual flu vaccination and the pneumonia vaccination provides some protection from Covid-19? Do you have a link to some research to this effect?

        1. This is for Wally above. It is not a published report yet. The research is still on-going. Taiwan has a universal health care system, so the government is doing everything to lower the cost. Because everyone is in the system so the data is readily available for analysis. During this COVID19 crisis, it becomes clear people who has had pneumonia vac shot developed very little of respiratory complication. It makes the treatment a lot easier and a lot cheaper. This makes sense because the main cause of death associated with COVID19 is related to respiratory complication. Sure COVID 19 causes other types of problem. The flu shot is added in the study because of the DNA similarity. I have read some parts of the study. This research is far from completion. The whole world is still struggling with this virus. I am just following my friend’s advice to strength my own system and use caution whenever going out and about.

  6. We were making plans to attend the Tulsa rally, but decided last minute to skip the rally due to the potential violence. We were not concerned with the virus. As a minority Trump support, I have experienced verbal and physical violence and the dangers are real. Brad Pascale is on point.

    1. Thanks for sharing! Very helpful.

      I wonder if people are just getting used to living with the virus. Some even seem indifferent, especially young.

    2. I did say that fear of infection is the most bearish interpretation, not that it was necessarily the correct one. A more bullish one is, as you pointed out, that you didn’t go because of concerns over counter-protests.

  7. We have had a very good rally from the recent bottom of the market. I think the rise in new cases was just an excuse to take some profits. We might see weakness for a day or two more, and then on wards and upwards we go.

  8. Navarro spoke the truth and the market has sniffed it out, the trade deal with China is dead. For China it simply makes no sense to support Trump anymore, he is going to lose anyway. Trump has already realized that China is not going to step up their purchases and so his options are a) present “alternative facts” about China’s purchases or b) impose tariffs and hope to get the Chinese back into the deal. Option b is difficult because his “tough” campaign stance has already caused some deterioration in the relationship.

    1. I won’t count out Trump yet. We got more than 4 months left before the vote. A lot can happen between now and then.

      Should China take the risk of further alienating a President who won’t be running for another election?

      1. The market seems to agree with you. Despite Trump’s tanking poll numbers, the Biden/Trump betting odds have steadied in the last week on PredictIt.

      2. Don’t count Trump out. Remember:
        Mondale’s huge lead was 22 months before the election. He won one state.
        Dukakis’s huge lead was 3+ months before the election. He won 10 states.
        Hillary’s was 1/2 months before the election. She won 20 states.

        Trump is still on track to carry 30 to 37 states in November.

        Trump could flip Colorado, Maine, Minnesota, Nevada, New Hampshire, New Mexico, and Virginia due to Democrat incompetence.

  9. Speaking of Houston, TX.. ICU capacity will be exhausted by tomorrow.

    I think the second wave is about arrive in TX.

    1. Alex, I don’t think the 1st wave ever ended. When I’m out I still see lots of people without masks. I think these people are relying on Fauci’s lie that masks don’t help that he made in March. He’s since changed his tune.

  10. Good news for Bulls. Dennis Gartman is heavily bearish. He’s not always wrong but often enough that you could make a good living fading his calls.

          1. Bloomberg doesn’t put dates anywhere on their stories. It looks like that may have been before the market bottom in March.

          2. OK. When I Googled Gartman/Youtube this morning the above link was labeled ‘2 days ago-‘ but that may simply refer to the fact that someone decided to post an old video two days ago…

  11. I don’t remember if this has already been shared, but check out for a real time dashboard on CV19 community spread in different US states.
    The founders of Instagram, no strangers to the power of “viral app growth”, applied their data crunching techniques that they learned from the early days of Instagram to Covid19.
    As you know, Rt is the rate of transmission of the virus: if it’s under 1.0, the virus will eventually disappear.

    1. Thanks, jyl087.

      Thanks also for the earlier link to the article in The Atlantic. My response to that – chronic fatigue syndrome has been linked to many viral infections, including Epstein-Barr, herpes, and hepatitis:

      I’m not ready to consider the Covid-19 version a unique syndrome. The overall incidence remains to be determined – out of several million infections, perhaps only a small percentage develop the condition.

      1. Understood. I’m not attempting to trivialize the condition, which may (or may not) be unique to Covid-19 (CV). There were many, many reports of chronic fatigue syndrome (CFS) beginning in the Eighties which sound quite similar to the stories we’re hearing now. The only difference being the signs and symptoms associated with CV – in which case it would be difficult to separate descriptions of the let’s say the ‘cracked-glass effect on lung CT scans’ and the implication that severe lung damage may be partly responsible for the fatigue (probably a yes) from overlying symptoms of CFS. I can’t come up with a figure, but there are probably millions of CFS sufferers worldwide – many of whom may have developed the condition following infection with Epstein-Barr.

        In any case, the other point to be made is that while the worst of the pandemic and its aftermath may lie ahead – the worst of its effect on the stock market may be behind us. The article below is one of many that have made the point:

        So let’s say millions of patients develop CFS post-CV. Would that affect the markets more than the tens of millions of fatalities due to the Spanish Flu?

        1. I don’t disagree that the stock market is not the same as the real economy. I’m nearly fully invested, but my take is that the new normal will not be the same as the old one, and I’m investing accordingly.

          1. Right – I had the impression that you’ve been long for some time.

            There’s no question the pandemic will permanently change the way we interact with the world and with each other. The attention to hand-washing may end up being a major plus by lowering the transmission rate of all diseases, not just CV19.

    1. I think the low was 3024 during the regular session on Thursday, although the overnight low in ES_F was 3008.

    1. I think we still get there, but I’m unclear on the time frame. If we don’t get that low by 2021 Q1 I will need to re-evaluate.

  12. I’ll eat my hat, as I’ve done repeatedly, if that 200 day 3020 MA isn’t soon broken and more.

    1. Indeed!

      What’s driving the market down? The rise in Covid cases? The rebalancing of portfolio from equity to bonds? If partly the latter, we should see some weakness until Tuesday, and then hopefully some bounce!

      Over the coming days and weeks, I hope to lighten up positions, raise cash and add some inverse ETFs in my portfolio. It’s not looking good.

      I think Cam’s expectations of a big correction will likely be realized by early Nov.

      1. What’s driving the market down? IMO, it’s the normal flow of cyclical moves. The media loves to assign daily reasons – not sure they’re meaningful.

  13. There are definitely advantages to a buy-and-hold strategy. There’s no need to over-analyze every twist and turn in the markets – even more so knowing that the strategy outperforms the majority of active funds.

    What’s amazing about 2020 is that the average Joe might actually be up for the year. Out of curiosity, I randomly selected what I thought might be a couple of popular funds for IRA investors – Fidelity’s Contrafund and Magellan fund. To my amazement, both have positive YTD returns.

  14. My thought is there will be some earnings reports that will negatively affect sentiment. The earliest come next week — “… Micron Technology opens the week on Monday, followed by FedEx and Conagra Brands on Tuesday. On Wednesday, Constellation Brands and General Mills both report.”

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