It's 2:45PM here on the Eastern seaboard - what a beautiful day to watch our Sharky jump at the shorts (see chart below).
After wrestling above and below the Shark Line throughout the week (thick green line), I think we have ourselves the 3-day confirmation of the TREND that I was looking for here in the SP500. It's a bull Shark!
Technology (XLK), Consumer Discretionary (XLY), and Basic Materials (XLB) have been signaling a TREND line breakout throughout the week. The US market is now proving that it can hold higher lows no matter what the Financials (XLF) do. When those Financials get squeezed (like they are today), there isn't much left but a Pain Trade.
On an immediate term basis, my next line of SP500 resistance (red dotted line) is 861.
Have a great weekend,
Keith R. McCullough
Chief Executive Officer
POSITION: Short the UK via the etf EWU
We've yet to see positive deltas across our macro factor model for the UK and the recent lack of clarity from Bank of England Governor Mervyn King on monetary policy inspires little confidence for a near-term recovery there.
This year we've had a consistently negative bias on Western Europe, especially with respect to the UK and Switzerland due to their leverage to financial services. We shorted the UK via EWU yesterday and Switzerland via EWL on 4/07.
The decision not to cut confirms Gordon Brown and Co.'s policy of let's "wait-and-see" quantitative easing as the BOE and Treasury move forward with their March 5th plan to print money and purchase 75 Billion Pounds of government bonds and corporate paper. From a monetary standpoint we stand firm with our thesis that the BOE has done "too little too late" to manage the interest rate and now is running out of room to cut.
UK data continues to look bleak. Manufacturing dropped 6.5% in the three months through February and declined 0.9% in February M/M. Unemployment, though a lagging indicator, shows a sequential monthly uptick. PPI increased 0.1% in March M/M, or rose 2% on an annual basis, the slowest annual pace in 20 months. February's CPI reading came in at 3.2%, down from 5.2% in Q408; you can expect a sharp decline in inflation this year and next. Should consumer demand not pick up despite downward pressure on prices, the UK could be in for an even longer "wait-and-see" recession. We'll be focused on retail sales, housing prices, and mortgage applications to better understand the depth of the abyss.
As the BOE continues to issue and buy-up Treasuries and take on debt the Pound should depreciate; this will benefit exports and push down imports, which should improve the country's trade balance. Yet the Pound has been relatively resilient versus the Euro and USD and despite initial declines after the March 5th announcement, the Pound has traded higher in the last two weeks.
The lack of leadership by Brown to instill confidence in the UK's recovery continues to be a decidedly bearish signal for us, one we believe will drag recovery further out on the curve.
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Malcolm Knapp reported that March casual dining same-store sales declined 4.9% and traffic declined 6.5%. Both of these numbers represent a sequential slowdown from February when comparable sales decreased 4.0% and traffic fell 5.6%. According to Malcolm Knapp, the last week of March was bad and was largely responsible for the drop off in sales relative to February (took about half a point off March same-store sales numbers). This March slowdown in overall casual dining sales further highlights RT's improved performance as of late as the company stated that its comparable sales continued to improve in March off of February levels, further narrowing the company's gap to Knapp.
On a quarterly basis, 1Q09 average casual dining same-store sales came in better than 4Q at -4.3% relative to -6% with traffic -6.0% in Q1 versus -7.7% in Q4. Discounting is most likely driving the lion's share of this traffic improvement.
I would have thought that a sequential slow down in Casual Dining same-store sales would have caused more of a disruption in restaurant stock performance. Given the sector's stock performance of late, it appears that the market is more focused on costs and not sales. Significant cost cutting, lower commodity costs and reduced labor costs are helping restaurant operators manage margins for the time being. With cost cutting being "one time" in nature, it is only a matter of time before investors return to a more intense focus on same-store sales trends.
Last Friday, I wrote a note on US Employment that stirred the pots of the Depressionistas - it was titled "This Is BIG: US Employment Is Turning"...
Understanding that the peak of unemployment growth is measurable is what it is. Some people buy into this investment process, some people don't. For me, what happens on the margin is what matters to my macro model the most.
While monthly unemployment reports are more lagging economic indicators than anything else, the weekly jobless claims numbers are a much more concurrent indicator of quantifiable deltas.
One week certainly does not a TREND make, but this week's jobless report wasn't worse than last week's, and that is a point in and of itself. Initial jobless claims this morning fell from 674,000 last week to 654,000 this week. Most importantly, the weekly reading (which is subject to revisions) cracked the powerful upward momentum in the 4 week moving average (see chart below).
This morning I labeled the short squeeze in US Consumer Discretionary the Pain Trade. Today's early morning squeeze in the XLY (Discretionary ETF) isn't a marked-to-model price - its real - and the XLY is up another +4% today as a result. From mortgage rates, to y/y gas prices, to asset reflation, everything that matters to the American consumer has improved, on the margin.
For those who call measuring deltas silly, I hope you can remain in these short positions longer than those on the bid can remain solvent. This Pain Trade's fundamental underpinning continue to improve. Alas, hope, is not an investment process.
Keith R. McCullough
Chief Executive Officer
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