The stock market is in risk-on mode as a sharp decline in COVID-19 cases means a big economic surprise is.. - Business Insider

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• A sharp decline in COVID-19 cases is leading to a newfound risk-on mode for the stock market, Fundstrat's Tom Lee said in a note on Thursday.
• The bullish groundswell in stocks is evidenced by a rally in high-yield bonds and declining volatility.
• If the COVID-19 downturn continues, a quicker-than-expected opening of the US economy would represent a big upside surprise for the market, Lee said.
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The US stock market is entering "risk-on" mode as COVID-19 cases stage a sharp decline, Fundstrat's Tom Lee said in a note on Thursday.

Daily cases of COVID-19 in the US have seen 10 consecutive days of declines, likely helped by both the rollout of vaccines and continued restrictions towards gatherings. 

"We are now seeing the strongest string of declines (7-day delta) that was not seen since Wave 2 ended over the Summer," Lee explained. 

"This is a big downturn," Lee said, adding that if the vaccination rollout moves forward strongly, investors could see an "economic surprise" if the US economy opens sooner than expected.

The stock market already appears to be taking note and displaying signs of risk-on mode as high-yield bonds rally and as the Cboe Volatility Index - or VIX - continues to fall lower. The VIX traded just above the 21 level Friday afternoon, representing a more than 20% decline from its intraday high reached on January 4. 

"We think risk/reward remains positive for stocks," Lee explained, adding that a continued downturn in COVID cases would be supportive of a rally in small-cap and cyclical stocks that were most impacted by the pandemic. 

Read more: BANK OF AMERICA: Buy these 31 unheralded stocks as the recovery's hottest trades of recent months continue to gain strength in 2021

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