SP500 Levels, Refreshed: Lines In The Sand

Keith is up in Camden, Maine at the PopTech conference and called in the updated risk management levels for the SP500.  Just like the line around the Greek Parliament in the chart below, the SP500 has TRADE line of support at 1,187.  If you didn’t know this was a macro driven market, now you know.

At Hedgeye, we don’t use crystal balls, but rather utilize our process, models, and good old fashion elbow Greece (pun intended).  Certainly, there is possibility that some maginal conclusion is reached this week in Europe, though the markets appear to be indicating otherwise.  Most notably, perhaps, is the Italian sovereign debt market.  Currently, the Italian 10-year is at 6.02%, which is slighly below the 12-month high of 6.20% reached on August 8th, 2011.   This is also a more than +10% increase in yields in just the last two weeks.

Greek may be marginal, Spain may be marginal, but Italy matters.  On a nominal basis, Italy is the 8thlargest economy in the world.  More importantly, according to the most recent estimates Italy has more than 118% debt-to-GDP, or ~$2.4 trillion in debt outstanding.  Roughly speaking, a +1% move in interest costs equate to +$24 billion in additional interest expenses and and a roughly +2.2% increase in Italy’s budget deficit.  The Italy government bond market apparently doesn’t believe the Eurocrats will find a solution imminently.

As Henry Kissinger said famously years ago:

“When I need to call Europe, who do I call?”

Perhaps we will find out this weekend, though we have our doubts.

We remain short the Euro, via FXE, in the Virtual Portfolio.

Daryl G. Jones

Director of Research

SP500 Levels, Refreshed: Lines In The Sand - SPX