Keith is on the road on the Left Coast (i.e. San Francisco) meeting with Hedgeye subscribers, but just called in his updated levels for the SP500. The key trend line of support is 1,324, which is currently broken with the SP500 at 1,318 (3:15pm). From the perspective of the Hedgeye quantitative models, closing prices are ultimately what matters, but this price is an important flag intraday.
In the first chart below, we’ve highlighted our current levels for the SP500. The key takeaway is that if the 1,324 trend line of support is broken then 1,214 is legitimately in play as the next stop for the SP500. This is 9% downside from current levels.
The deluge of data that we’ve received over the last two days has confirmed a thesis that we’ve been postulating for most of the year, which is that Accelerating Inflation will lead to Slowing Growth. Yesterday, Chicago PMI, housing prices, and consumer confidence were all worse than expected. Today, ISM Manufacturing hit 53.5, which was worse than the expected and a sequential decline from 60.4. In addition, the ADP employment number came in at +38K, versus an expectation of +175K. Thesis confirmed.
As a further confirmation of slowing growth, we’ve also highlighted a chart of the yield on 10-year Treasuries, which are currently yielding 2.96. This is down from 3.28% a month ago, and its year-to-date high of 3.74% on February 8th. There is a reason that one of our top ideas is the etf FLAT, which is a bet on the flattening of the yield curve. Simply put, as growth slows, the yield curve flattens.
In the Early Look today we highlighted NYSE margin debt being at an extreme of 1.5 standard deviations above its long-term mean. As another proxy for equity froth, or the potential for a froth correction, we would highlight the IPO pipeline, which currently stands at 165 companies filed. The last time the IPO pipeline was this substantial was in 2000. In the last chart below, we’ve highlighted the recent IPO of LinkedIn, which emphasizes how quickly the speculative appetite of the equity market can adjust. LinkedIn is down -20% in the last week.
The next major catalyst for the equity market will likely be the jobs report on Friday. The only potential positive ahead of that report is that expectations have been cut dramatically in the last couple of days led by Deutsche Bank, who cut their estimates for non-farm payrolls from 300,000 to 160,000 in the last two days alone.
Daryl G. Jones