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July 19, 2021, 12:21 p.m. EDT

COVID-19 cases may cause an S&P 500 correction, analyst says. Buy these stocks in the next dip.

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Jack Denton

It’s a rough start to the week for markets. Dow industrials tumbled more than 800 points, following European and Asian stocks lower and setting the tone for turbulence ahead.

Blame rising COVID-19 cases globally, and the spread of the more infectious delta variant of coronavirus.

What we’re seeing in markets is a “July chop” triggered by the delta variant, according to analyst Thomas Lee of Fundstrat Global Advisors. Our call of the day is from Lee, who said that delta variant concerns could lead to a 5% correction for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.91% , setting up certain types of stocks for a strong rally through the rest of 2021.

Daily U.S. COVID-19 cases are approaching the 30,000 mark, but there is a risk that infections could go “parabolic” with the spread of the delta variant, and rise to around 100,000, Lee said. 

The delta variant could create panic, because markets and investors typically focus on case counts as opposed to hospitalizations, Lee said — and as many as 82 million Americans remain unvaccinated or without COVID-19 antibodies. However, hospitalizations remain low.

This delta variant has a lot of “bark” and is unnerving for investors, Lee said, even if there’s not a strong “bite.” It could add weight to a “July chop” that has history on its side. Since 1928, a strong first half of the year leads to a flat or negative July.

While the S&P 500 was up 0.7% in July as of the end of last week, “this belies the violent sector rotations taking place within the broader market,” Lee said.

The Fundstrat analyst said that he doesn’t expect the chop caused by the delta variant to cause a 10% or larger decline in stocks, but a 5% drop for the S&P 500 is possible.

So while there’s little reason to be hugely bearish — because bond spreads indicate wider stability for stocks, and volatility measures are not signalling broader weakness — this “vicious” risk-off correction creates opportunities.

Lee is bullish on “epicenter” stocks — shares in companies battered by the pandemic and set to benefit from the reopening — like travel, consumer discretionary, energy, and basic materials. As well, Fundstrat is overweight on Big Tech, with the likes of Facebook /zigman2/quotes/205064656/composite FB -2.24% , Apple /zigman2/quotes/202934861/composite AAPL -1.83% , Amazon /zigman2/quotes/210331248/composite AMZN -0.74% , Netflix /zigman2/quotes/202353025/composite NFLX +0.49% and Google owner Alphabet /zigman2/quotes/202490156/composite GOOGL -1.96% considered strong picks.

The buzz

Billionaire investor Bill Ackman’s blank-check, special-purpose acquisition company Pershing Square Tontine Holdings /zigman2/quotes/219769662/composite PSTH +0.10% will not proceed with its proposed acquisition of a 10% stake in Universal Music Group, owned by French media giant Vivendi /zigman2/quotes/202179234/delayed FR:VIV -0.44% . Instead, his Pershing Square Holdings firm will make the investment. 

On the U.S. economic front , investors can expect the National Association of Home Builders’ housing market index for July, which measures the market conditions for the sale of new single-family homes.

OPEC+, the group of oil-producing countries including Russia and Saudi Arabia, agreed on Sunday to further relax oil production cuts as demand for crude continues to rise and price soar. Production will rise by 400,000 barrels a day each month beginning in August and will eventually undo all of the pandemic-era curbs. Benchmark Brent crude tumbled below $70 a barrel and was set for the largest one-day loss since March .

Zoom plans to buy Five9 /zigman2/quotes/209043265/composite FIVN +4.08% in an all-stock deal valuing the provider of cloud contact center solutions at $14.7 billion. The acquisition is meant to help Zoom /zigman2/quotes/211319643/composite ZM +3.40% — which became a ubiquitous form of video communication through the pandemic — expand further into the enterprise market.

The markets

U.S. stocks were experiencing a rough day /zigman2/quotes/210598065/realtime DJIA -0.48% /zigman2/quotes/210599714/realtime SPX -0.91% /zigman2/quotes/210598365/realtime COMP -0.91% as analysts note that investors focus centers on the risk to markets from rising COVID-19 cases globally.

Equities tumbled in Europe /zigman2/quotes/210599654/delayed XX:SXXP -0.88% /zigman2/quotes/210598409/delayed UK:UKX -0.91% /zigman2/quotes/210597958/delayed FR:PX1 -0.79% /zigman2/quotes/210597999/delayed DX:DAX -1.03% , following weakness in Asian markets /zigman2/quotes/210597971/delayed JP:NIK +0.58% /zigman2/quotes/210598030/delayed HK:HSI +1.03% /zigman2/quotes/210598127/delayed CN:SHCOMP +0.19% .

The chart

Retail sales spikes caused by the pandemic have led to shortages of all kinds. Our chart of the day, via Wolf Richter of the Wolf Street financial blog , shows the “catastrophic” condition of inventories at auto dealers — which before the pandemic made up more than one-third of all retail inventories.

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/zigman2/quotes/210599714/realtime
US : S&P US
4,432.99
-40.76 -0.91%
Volume: 3.79B
Sept. 17, 2021 5:25p
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/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 364.72
-8.34 -2.24%
Volume: 26.30M
Sept. 17, 2021 4:00p
P/E Ratio
27.01
Dividend Yield
N/A
Market Cap
$1028.31 billion
Rev. per Employee
$1.47M
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 146.06
-2.73 -1.83%
Volume: 129.87M
Sept. 17, 2021 4:00p
P/E Ratio
28.61
Dividend Yield
0.60%
Market Cap
$2414.40 billion
Rev. per Employee
$1.86M
loading...
/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,462.52
-25.72 -0.74%
Volume: 4.62M
Sept. 17, 2021 4:00p
P/E Ratio
60.35
Dividend Yield
N/A
Market Cap
$1753.56 billion
Rev. per Employee
$297,430
loading...
/zigman2/quotes/202353025/composite
US : U.S.: Nasdaq
$ 589.35
+2.85 +0.49%
Volume: 4.15M
Sept. 17, 2021 4:00p
P/E Ratio
61.10
Dividend Yield
N/A
Market Cap
$260.84 billion
Rev. per Employee
$2.66M
loading...
/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 2,816.00
-56.20 -1.96%
Volume: 2.67M
Sept. 17, 2021 4:00p
P/E Ratio
30.53
Dividend Yield
N/A
Market Cap
$1881.83 billion
Rev. per Employee
$1.35M
loading...
/zigman2/quotes/219769662/composite
US : U.S.: NYSE
$ 19.70
+0.02 +0.10%
Volume: 3.01M
Sept. 17, 2021 4:00p
P/E Ratio
24.11
Dividend Yield
N/A
Market Cap
$3.94 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/202179234/delayed
FR : France: Euronext Paris
31.75
-0.14 -0.44%
Volume: 12.89M
Sept. 17, 2021 5:37p
P/E Ratio
30.18
Dividend Yield
1.89%
Market Cap
€33.23 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/209043265/composite
US : U.S.: Nasdaq
$ 175.06
+6.87 +4.08%
Volume: 4.66M
Sept. 17, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$11.86 billion
Rev. per Employee
$280,767
loading...
/zigman2/quotes/211319643/composite
US : U.S.: Nasdaq
$ 287.68
+9.46 +3.40%
Volume: 5.42M
Sept. 17, 2021 4:00p
P/E Ratio
86.91
Dividend Yield
N/A
Market Cap
$85.48 billion
Rev. per Employee
$599,586
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
34,584.88
-166.44 -0.48%
Volume: 577.97M
Sept. 17, 2021 5:25p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
4,432.99
-40.76 -0.91%
Volume: 3.79B
Sept. 17, 2021 5:25p
loading...
/zigman2/quotes/210598365/realtime
US : Nasdaq
15,043.97
-137.96 -0.91%
Volume: 6.16M
Sept. 17, 2021 5:16p
loading...
/zigman2/quotes/210599654/delayed
XX : STOXX
461.84
-4.11 -0.88%
Volume: 0.00
Sept. 17, 2021 11:03p
loading...
/zigman2/quotes/210598409/delayed
UK : FTSE UK
6,963.64
-63.84 -0.91%
Volume: 0.00
Sept. 17, 2021 4:54p
loading...
/zigman2/quotes/210597958/delayed
FR : France: Euronext Paris
6,570.19
-52.40 -0.79%
Volume: 214,006
Sept. 17, 2021 6:05p
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/zigman2/quotes/210597999/delayed
DAX
DX : Xetra Indices
15,490.17
-161.58 -1.03%
Volume: 158,392
Sept. 17, 2021 6:30p
loading...
/zigman2/quotes/210597971/delayed
JP : Nikkei
30,500.05
+176.71 +0.58%
Volume: 0.00
Sept. 17, 2021 3:15p
loading...
/zigman2/quotes/210598030/delayed
HK : Hong Kong Exchange
24,920.76
+252.91 +1.03%
Volume: 3.10M
Sept. 17, 2021 4:08p
loading...
/zigman2/quotes/210598127/delayed
CN : China: Shanghai
3,613.97
+6.87 +0.19%
Volume: 51.69B
Sept. 17, 2021 3:01p
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