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

It’s a rough start to the week for markets. Stocks sold off in Asia and Europe, and Dow industrials futures tumbled more than 500 points setting the tone for a turbulent day…

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 SPX, -0.75%, 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…

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