TODAY’S S&P 500 SET-UP - September 28, 2011




Yesterday was a really close confirmation of another immediate-term TRADE breakout (within a bearish TREND and TAIL) of the SP500.  As we look at today’s set up for the S&P 500, the range is 64 points or -4.88% downside to 1118 and 0.56% upside to 1182.




TRADE, TREND, and TAIL lines for the SP500 remain broken as long as 1182 SPX does. Only 1 Sector of 9 is bullish TRADE and TREND - (Utilities XLU). Of the 8 of 9 Sectors that remain bearish TREND, Financials (XLF) still look the worst followed by Basic Materials (XLB) and Consumer Staples (XLP).


The Consumer Staples risk continues to evolve as the US Dollar’s strength does; FX risk is a trivial headwind for EPS.  If 1182 (SPX) is overcome and the Greeks and Italians jump over the moon, everything should be fine into month-end.









  • ADVANCE/DECLINE LINE: 1938 (+537) 
  • VOLUME: NYSE 1190.10 (+2.83%)
  • VIX:  37.71 -3.36% YTD PERFORMANCE: +112.45%
  • SPX PUT/CALL RATIO: 1.82 from 1.86 (-2.02%)


  • TED SPREAD: 35.51
  • 3-MONTH T-BILL YIELD: 0.01% -0.01%
  • 10-Year: 2.00 from 1.91     
  • YIELD CURVE: 1.75 from 1.66 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage, est. -0.2%
  • 8:30 a.m.: Durable goods, est. -0.2%
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: U.S. to sell $35b 5-yr notes
  • 5 p.m.: Fed’s Bernanke speaks in Cleveland. Prepared text, Q&A


  • hosts press event, said to announce new tablet device. Watch for details on who may sell it, parts suppliers, pricing
  • President Obama’s $447b jobs plans would help avoid return to recession: Bloomberg economist survey
  • Boston Fed President Rosengren called for more govt efforts to help homeowners refinance mortgages
  • President Obama participates in an “Open for Questions” roundtable at White House, 11:25 a.m.; delivers annual back- to-school speech at Benjamin Banneker High School in Washington, 1:30 pm
  • N.J. Gov. Chris Christie said he plans to sit out the 2012 presidential race
  • U.S. nuclear regulators meet for a second day to consider Southern’s request to build two reactors at its Vogtle plant near Augusta, Georgia



COPPER – Dr Copper can teach us a lot, if we are willing to re-learn; you’d think that a 1-day short squeeze in everything commodities would see more than a day of follow through – not so much; Copper down another 2% this morning and crashing.


GOLD: we sold it yesterday, keeping Friday's trade a trade; immediate-term downside to $1603 $GLD





  • LME Takeover Bids Mean Most at Stake for Goldman Sachs, UBS
  • Coffee Falls in Rout as Starbucks Cup Costs $1.50: Commodities
  • Chaoda Faces Second Hong Kong Market Misconduct Hearing Today
  • Gold May Gain in London on Physical Purchases, Europe Concern
  • Oil Falls, Heading for Quarterly Decline on Europe Debt Crisis
  • Russian Oil to Fall as Tax Spurs Urals Exports: Energy Markets
  • BP May Quadruple Indonesian Gas Plant as Part of Asian Drive
  • Commodities Drop, Deepening Quarterly Decline, on European Risk
  • Wrong Reasons Hurt Corn, Says UN, as Morgan Stanley Bullish
  • Russia Expands Ports to Regain Wheat Export Advantage: Freight
  • Commodities Rise Most in Four Months as European Concerns Ebb
  • Spot Gold, Gold Futures Resume Decline on Europe Crisis Efforts
  • Oil Surges Most in Four Months on European Debt-Crisis Efforts
  • Dairy Has Greater Resilience in Slowdown, New Fonterra CEO Says
  • Ship Owner Losses Persist on Glut as Mine Profits Boom: Freight
  • Gold Climbs Most in Seven Weeks as Commodities, Equities Rally
  • Aluminum Product Shipments by Japan Drop for Third Month
  • Billionaire Ross Says Ship Deals to Accelerate After Slump
  • Typhoon Nesat Kills 20 in Philippines, to Hurt Rice Harvest



FX: Euro/USD has a wall of resistance between here (1.36) and its broken TAIL line of 1.39






Thanks for the timing on this  - “BOE's Financial Policy Committee says Britain's banks face "materially" increased risks from the euro zone debt crisis; recommended that banks should take any opportunity they had to strengthen their levels of capital and liquidity”


EUROPE: sketchy situation developing with DAX recovering my TRADE line of support and CAC and MIB failing at it.


GREECE: lots of rumors; no market support for them - Greek stock market hitting fresh YTD lows here this morning (down -55% since FEB)


FINLAND: important market to watch today in Global Macro as they vote on Euro-TARP bazooka; early read through not good - Finland down -1.5%


FRANCE: no GDP growth in Q2 (reported at 0.0% q/q). No way for these politicians got their forecasts right if they are this wrong on growth.






ASIA: Hang Seng (which we're short) down -26% since the April highs; Korea crashing obviously as well (down -23% since May)


ASIA: very bearish follow through from European and American hope rally yesterday with China, KOSPI, and HK all down in response.








Howard Penney

Managing Director

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I want someone to accuse me of looking through the sluggish numbers just to find a silver lining!


The consensus thesis on the consumer is consistent with a fundamentally-weak economy: no job growth, declining real income, Bernanke-inspired price volatility, declining stock prices, falling house prices, sticky gasoline prices, and zero confidence.


Overall, the MACRO data out today on consumer trends is consistent with the factors listed above.  Yet, there are silver linings!  Well, maybe…


Today, the high frequency – ICSC chain store sales index – confirms the decelerating thesis, as the index fell 0.2% last week.  This is consistent with the painfully slow downward trend (the index is now down 6 of the last 8 weeks.)  On a year-over-year basis, growth dipped to 2.7%, the slowest pace in three weeks, though consistent with the trends of 1H11.  Is there a silver lining here?


Also bouncing along the bottom is the Richmond Fed survey, which contracted for the third consecutive month in September. The pace of decline moderated from August, as the composite index rose 4 points to -6.  Looking at the details, new and unfilled orders remained on downward trends but employment growth accelerated and input cost pressures eased.  The increase in employment month-over-month is the first silver lining in the overall sluggish environment


Lastly, after plunging 14 points in August, the Conference Board Confidence Index was virtually unchanged in September (rising only 0.2).  Last month saw a slight 0.7-point upward revision to the August print.  The improvement was led by better employment expectations, which is the second silver lining.


If the economy were to accelerate confidence should recover, but given the excessive debt burden domestically and in Europe, it’s unlikely that growth is going to accelerate.  Our 3Q GDP estimate is 1.1 to 1.4% year-over-year; the risk to the downside is that the low confidence results stay on a continued downward trajectory in sales trends, and causes further economic weakness. 


The third silver lining is not one from today’s data, but one that economists often cite as a reason to buy equities here: that corporate America is flush with cash.  That cash waiting in the wings coupled with pent-up demand could lead to a quick improvement in the jobs picture and an acceleration of growth.


Hope springs eternal, but is not an investment process!




Howard Penney

Managing Director

Commodities and Correlations

Conclusion: Given the historical inverse correlations, a strengthening U.S. dollar is likely to continue deflating key commodity prices, which is positive, on the margin, for the U.S. economy. 


One the more bullish factors in our global macro models as of late is the strength in the U.S. dollar.  In the short term, this is viewed as a flight to safety as global asset allocators get increasingly concerned about the outlook of the euro and the global economy and naturally reallocate funds into U.S. dollar-denominated assets.  In both the short term and long term, a strong U.S. dollar has one key positive benefit, which is a Deflation of the Inflation.


As we’ve consistently highlighted over the course of the past three years, the key driver of many global asset prices has been and will continue be the direction of the U.S. dollar versus other major currencies.  In the chart below, we’ve charted the U.S. Dollar Index versus WTI oil and copper going back three years.  In fact, according to our analysis the correlation between the U.S. dollar index and both copper and oil going back three years is -0.77 and -0.68, respectively.


Commodities and Correlations - 1


The immediate term impact of Deflating the Inflation is at the gas pump in the United States.  As of last week’s retail pricing across the United States, gasoline was priced at $3.51 per gallon and diesel was priced at $3.79 per gallon.  On year-over-year basis, as of last week, the price in gasoline is up +29.9% and the price of diesel is up +28.3%.  On a year-over-year basis, this is obviously not great news, but gas prices are also now at their lowest level since March 2011 and prices have been declining for the last four weeks, so, on the margin, we are seeing some alleviation of the energy consumption tax.


Commodities and Correlations - 2


In the short term, gasoline demand has been proven to be inelastic, so when prices change demand does not change meaningfully.  Therefore, it is likely that these gas savings potentially get funneled back into other areas of consumer spending. 


As a frame of reference for the potential impact to the economy of changing energy prices, according to the Energy Information Administration in 2009 the United States consumed roughly 19.2 MM barrels of oil per day (2/3rds in transportation alone).  This equates to just over 7 billion barrels of oil per year.  Thus, a $10 deflation of the price of oil on an annualized basis leads to $70 billion that can be reallocated within the economy.  In aggregate terms this decrease in the price of oil has a potential positive impact of ~+0.6% on GDP growth.


As an interesting aside, the only two major commodities that have shown a positive correlation to the U.S. dollar over the last three years are natural gas and lumber with +0.49 and +0.62, respectively.  On natural gas, this is somewhat understandable as natural gas, due to transportation costs, is a localized market that is priced based on local supply and demand dynamics.  The lumber point is more interesting and seems to at least tangentially suggest what we’ve often theorized, which is that a strong dollar will lead to a willingness by foreign investors to purchase excess U.S. real estate assets (and thus buoy the price of housing materials).


As it relates to correlations, another key risk point we wanted to highlight is globally increasing correlations between markets and asset classes.  This is occurring in fixed income markets versus equities (at a 40-year high in Europe according to reports), in components of the emerging markets versus the emerging markets index, and between subsectors in the U.S. market.  To the last point, we’ve highlighted in the chart below this strengthening correlation in the U.S. of the SP500 versus its key sectors.  This outcome of increased correlation is, obviously, increased directional risk, but also increased performance risk, as Alpha becomes increasingly difficult to come by.


Commodities and Correlations - 3


Daryl G. Jones

Director of Research

No Rush: SP500 Levels, Refreshed

POSITION: Short Consumer Staples (XLP)


So far, I’m at least a day early going back to 0% US Equity exposure. Being early is also called being wrong.


After the August-September my team has had, I’m not willing to put on the crash-helmet-risk for the sake of another immediate-term TRADE breakout in the SP500.


That doesn’t mean that we aren’t seeing a breakout above my TRADE line of 1182 by the way. It just means I’m not willing to get sucked into another month-end markup.


When I moved the Hedgeye Portfolio back to net short on August 30th (first time I’d done that since June 23rd), it was because my immediate-term TRADE range had run out of price range and the end of the month had run out of time. Time and Price is what I do. There’s still room here.


Today, provided that 1182 holds, there’s still immediate-term TRADE upside to 1203. So, I wait and watch. Both the intermediate-term TREND and long-term TAIL (1266) for US Equities remain broken.


I’m in no rush to get net short, yet.



Keith R. McCullough
Chief Executive Officer


No Rush: SP500 Levels, Refreshed - SPX


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