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Takeaway: Don’t be a hero; let process, not emotions determine you next move(s).

Sadly, the US equity market and global economy remains at the perfectly frustrating whims of our central planners in Washington D.C. On the realization that a CY12 Fiscal Cliff compromise is unlikely to be agreed upon, stocks are broadly selling off. Looking to the S&P 500 Index specifically, the market is now bearish from a TRADE and TREND perspective on our quantitative factoring with no support to our TAIL line of 1,371.

Across our core risk management durations, our updated levels for the SPX are:

  • Bearish TRADE = 1430
  • Bearish TREND = 1419
  • Bullish TAIL = 1371

At Hedgeye, we remain firm believers of the reflexive relationship between PRICE and economic fundamentals. In that vein, the current quantitative setup of the US stock market tells us that:

  1. We are likely to go over the Fiscal Cliff – whatever that means (more on this later); and
  2. The underlying momentum of the US and global economy is stabilizing and poised to gather steam.

Regarding point #1: Unlike the credibility of the Old Wall’s legacy media sources, the US economy won’t run into the proverbial wall on JAN 1st, 2013. In fact, the full economic impact of tax hikes and sequestration will be lagged and cumulative throughout CY13. Consider it more like running up a steep hill, rather than falling off a cliff, per se.

Additionally, any negative impacts can be retroactively adjusted for if and when a compromise is reached – likely no later than MAR, according to our latest in-depth analysis of the debt ceiling and the implications therein for Fiscal Cliff negotiations: “DEBT CEILING UPDATE: WILL SANTA’S SACK BE FILLED WITH COAL?” (NOV 16). That could turn out to be a boon for 2Q13 GROWTH, especially if 1Q13E comes in slower than initially anticipated.

Regarding point #2: We continue to get data both domestically and internationally that supports our baseline fundamental view that global GROWTH is stabilizing, which is better than slowing and not as good as accelerating. To juxtapose:

  • The supertankers within my geographic coverage areas (i.e. China and Japan) both showed weak DEC PMI data out this morning; moreover, Japan’s NOV Industrial Production data supports our view that the country’s recession will extend into 4Q12; while
  • The little boats that tow the larger boats into and out of the docks (pardon my lack of boating jargon) within my geographic coverage areas (i.e. Singapore and Hong Kong) confirmed with their NOV Industrial Production, Trade and PMI data that the global economy is, in fact, leaving the dock – albeit at a very measured pace.
  • The latest US Housing Price and Home Sales data suggests a formerly key component of the US economy is roaring back and poised to accelerate in 2013; while
  • Yesterday’s domestic Consumer Confidence bomb and generally disappointing Retail Sales figures during the Holiday Season are major causes for concerns as it relates to the sustainability of any domestic economic recovery.

How does one balance good and bad data in their head, while at the same time remaining sane enough to make capital allocation decisions? That’s easy: tune out the noise and listen the PRICE signals. For now, those signals suggest defensive positioning is warranted. Conversely, a close above 1,419 would suggest the opposite is true. Whatever you do, don't make it any more complicated than that.

Have a great weekend,

Darius Dale

Senior Analyst

BEARISH: SP500 LEVELS, REFRESHED - SPX