Fundstrat's Tom Lee says another epic rally in stocks hit hardest by COVID-19 could be coming soon

• Fundstrat's Tom Lee said stocks in sectors hit hardest by the pandemic like travel and retail may be due for a rally.
• The head of research explained that the third wave of COVID-19 cases may be peaking in the US. When this happened after the second wave, epicenter stocks rallied shortly after, he said.
• "From a market's perspective, a rolling over of COVID-19 should be a "risk-on" signal for epicenter stocks," said Lee. "The reason, naturally, is that epicenter stocks are more sensitive to lockdowns and benefit from economic re-opening.
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History shows that another rally for stocks hit hardest by the pandemic could be on the way.

That's according to Fundstrat's Tom Lee, who wrote in a note to clients on Monday that "epicenter stocks," or stocks in sectors like travel, retail, and services, could be poised to gain in the near future.

The head of research explained that the third wave of COVID-19 cases may be peaking in the US. When this happened after the second wave, epicenter stocks rallied shortly after, he said.

"From a market's perspective, a rolling over of COVID-19 should be a "risk-on" signal for epicenter stocks," said Lee. "The reason, naturally, is that epicenter stocks are more sensitive to lockdowns and benefit from economic re-opening. Hence, we should expect the epicenter stocks to rally."

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Lee said that the percentage of the US with declines in COVID-19 cases is at 62%. That's the highest level since August. He also noted a recent comment from former FDA commissioner Dr. Scot Gottlieb, who said on Sunday that COVID-19 cases may be peaking nationally. This thinning out of cases could be a good sign for stocks that hinge on an economic reopening.

Although this could be a temporary rollover of cases, and holiday gatherings could cause a spike in cases, Lee said COVID-19 is still rolling over earlier than he expected.

Names in his basket of epicenter stocks include travel companies like MGM Resorts, Hilton Worldwide, Marriott, Norwegian Cruise Line, and Royal Caribbean, retailers including AutoNation, Harley-Davidson, Hasbro, L Brands, and Best Buy, and restaurants like Darden Restaurants and Starbucks.