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

It’s a tough start to the week for markets. Shares sold in Asia and Europe, and Dow Industrials futures tumbled more than 300 points, setting the scene for a turbulent day ahead.

Blame increasing COVID-19 cases worldwide and the spread of the more contagious delta strain of coronavirus.

According to analyst Thomas Lee of Fundstrat Global Advisors, we are seeing a ‘July chop’ in the markets caused by the delta variant. Our call of the day is from Lee, who said concerns about the delta variant could lead to a 5% correction for the S&P 500 SPX,
-0.75%,
setting up certain types of stocks for a strong rally through the rest of 2021.

Daily COVID-19 cases in the US are approaching 30,000, but there is a risk that infections could become “parabolic” with the spread of the delta variant, reaching about 100,000, Lee said.

The delta variant could cause panic as markets and investors typically focus on case count as opposed to hospitalizations, Lee said — and as many as 82 million Americans remain unvaccinated or without COVID-19 antibodies. However, the number of hospital admissions remains low.

This delta variant has a lot of “bark” and is unnerving for investors, Lee said, even when there’s no strong “bite.” It could add weight to a “July pork chop” that has history on its side. Since 1928, a strong first half has led to a flat or negative July.

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

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

So while there’s little reason to be wildly bearish – as bond spreads point to greater stability for stocks, and volatility measures don’t point to broader weakness – this “vicious” risk-off correction creates opportunities.

Lee is optimistic about ‘epicenter’ stocks – stocks in companies battered by the pandemic that will benefit from the reopening – such as travel, consumer discretionary, energy and basic materials. Fundstrat is also overweight in Big Tech, such as Facebook FB,
-0.96%,
Apple AAPL,
-1.41%,
Amazon AMZN,
-1.59%,
Netflix NFLX,
-2.33%
and Google owner Alphabet GOOGL,
-0.03%
considered strong choices.

the buzz

Billionaire investor Bill Ackman’s blank check, special acquisition firm Pershing Square Tontine Holdings PSTH,
-1.81%
will not proceed with the proposed acquisition of a 10% stake in Universal Music Group, owned by French media giant Vivendi VIV,
-1.75%.
Instead, his Pershing Square Holdings group will make the investment.

On the US economic front, investors can expect July’s housing market index from the National Association of Home Builders, which measures market conditions for new single-family home sales.

OPEC+, the group of oil-producing countries including Russia and Saudi Arabia, agreed on Sunday to further ease oil production cuts as demand for crude oil continues to rise and prices soar. Production will increase by 400,000 barrels per day every month from August, eventually removing any pandemic-era restrictions.

Zoom plans to buy Five9 FIVN,
+0.58%
in an all-stock deal valuing the cloud contact center solutions provider at $14.7 billion. The acquisition is intended to help Zoom ZM,
+1.45%
– which became a ubiquitous form of video communication due to the pandemic – is expanding further into the business market.

the markets

US stocks face a rough day: Dow industrials futures YM00,
-1.28%
fell nearly 350 points, while both the S&P 500 ES00,
-1.04%
and Nasdaq NQ00,
-0.81%
indicated a drop at the open. Analysts note that investors are focused on the risk to the markets of increasing COVID-19 cases worldwide.

Shares plunged in Europe SXXP,
-2.29%

UKX,
-2.37%

PX1,
-2.56%

DAX,
-2.74%,
after weakness in Asian markets NIK,
-1.25%

HSI,
-1.84%

SHCOMP,
-0.01%.

The graph

Chart via Wolf Street financial blog.

Pandemic-induced spikes in retail sales have led to all kinds of shortages. Our card of the day, via Wolf Richter or Wolf Street’s financial blog, shows the “catastrophic” state of stocks at car dealerships – which made up more than a third of all retail stocks before the pandemic.

Random reads

Tour de Franks: the world’s greatest cycling race was almost disturbed by a sausage truck stuck on the winding roads of the Col De Romme.

Broke chain technology: Malaysian police used a giant steamroller to destroy more than 1,000 crypto mining rigs seized from a property set up to steal electricity.

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