“I'm a sailor peg, and I lost my leg
I climbed up the topsails, I lost my leg
I'm shipping up to Boston.”
-Drop Kick Murphy’s
We shipped Keith up to Boston last night to visit with Hedgeye subscribers, but he hopped out of a meeting to call us on the bat phone and give us an updated look at the market. From a price perspective, the SP500 is shifting to a more incrementally bullish position from the TAIL perspective.
As outlined in the chart below, the SP500 is currently above the TAIL line. While we need a three week validation to turn bullish from a TAIL perspective, this is an important inflection point. On the shorter term TRADE duration, the SP500 is at 1,286 and beyond our overbought level of 1,279.
For those who are positioned more bearishly going into today’s action, no doubt it feels like you’ve “lost your leg”, or at least lost some relative performance. Although we covered our short of the SP500 yesterday in the Virtual Portfolio yesterday for a gain, we are still running a tight exposure with 9 longs and 8 shorts. Clearly, this is not ideal positioning for today.
A couple of thoughts, though, on both GDP and the European bailout:
1. GDP growth at 2.5% quarter-over-quarter and 1.6% year-over-year is certainly higher than we expected, though still below a level that would be needed to narrow the output gap or take the economy back to full employment in the near term. More interesting, and perhaps disconcerting, was that personal consumption was a key driver, despite consumer confidence readings remaining abysmal. Nonetheless, if we believe the number, the economy is on the margin improving, albeit at a tepid pace, and that is a positive.
2. Purportedly a solution in Europe has been reached, though yields in Europe are telling us a slightly different story. Specifically, the Italian 10-year yield is down to 5.87% today, but that is still near its highs of the year at 6.09%. As of yet, the bond markets don’t fully believe the Eurocrats. Interestingly, while the Germans approved leveraging of the EFSF, they DID NOT approve more German capital. In fact, the line was drawn at more German capital being contributed, which has longer term negative implications.
As Keith wrote yesterday, we’ll continue to respect what the market sees next . . . and that continues to be the case.
Daryl G. Jones
Director of Research
