S&P 500: Which Way Will It Go?

The market is getting tighter and has people on their toes this week. The S&P 500 is big on making a new all-time high every week it seems but 1626-1630 is not where you want to be chasing this index. It has the ability to fall off a cliff with no support until 1599. This week's economic data is what matters since a positive or less-than-bad number will keep the public happy.


S&P 500: Which Way Will It Go? - SPY ytd

Let's Go Crazy

Client Talking Points

Higher and Higher

The market is quite keen on going up these days. While some would argue a bullish case based on specific factors, we argue and make our bull case from a growth and consumption standpoint. US economic growth and consumption continue to gain and surprise on the upside via employment numbers and the like.

Squeezing Commodtities

Commodities continue to get squeezed, going the opposite way of the stock market. The CRB Commodities Index was down -0.4% yesterday and continues to look awful right now. Gold is the big one that everyone is focused on and continues to fail at our 1492 line of resistance. Oil is up next and lower prices at the pump help boost consumption.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.  


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road


"Always fun to break news faster than those paid to break it #OldMedia" -@KeithMcCullough


"The optimist proclaims that we live in the best of all possible worlds; and the pessimist fears this is true." -James Branch Cabell


China April Exports Rise 14.7% As Imports Gain 16.8%.


TODAY’S S&P 500 SET-UP – May 8, 2013     

As we look at today's setup for the S&P 500, the range is 71 points or 4.12% downside to 1559 and 0.25% upside to 1630.










  • YIELD CURVE: 1.57 from 1.56
  • VIX  closed at 12.83 1 day percent change of 1.34%

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications, May 3  (prior 1.8%)
  • 8:30am: Fed’s Stein speaks at Chicago Fed conference
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $3b-$3.75b debt in 2019-2020 sector
  • 1pm: U.S. to sell $24b 10Y notes


    • 9am: Congressional Progressive Caucus event w/ low wage workers employed under federal contracts, w/ Reps. Raul Grijalva, D-Ariz.; Keith Ellison, D-Minn.; Barbara Lee, D-Calif.; Rep. Jan Schakowsky, D-Ill.
    • 9am: Mandiant CEO Kevin Mandia, Symentec cyber VP Cheri McGuire testify on Senate Judiciary Cmte panel on law enforcement, private sector responses to cyber threats
    • 10am: Senate Health, Education and Labor Cmte votes on nomination of Thomas Perez to Labor sec
    • 10am: House Natural Resources Cmte hearing on hydraulic fracturing
    • 11:30am: House Oversight holds Benghazi hearing
    • 11:30am: Sen. Chris Murphy, D-Conn., Rep. Mo Brooks, R-Ala., Rep. Tim Ryan, D-Ohio, participate in Alliance for American Manufacturing news conf. on supply chain vulnerabilities, natl security risks in defense industrial base
    • Sanford defeats Colbert’s sister in South Carolina


  • Yahoo CEO Mayer said to seek ways to end Microsoft search deal
  • Microsoft CFO search said to pit Windows’ Reller against Hood
  • Sprint said to press Dish for details before its due diligence
  • Fannie Mae settles investor accounting lawsuit for $153m
  • Whole Foods raises annual forecast as same-store sales improve
  • “Bullish” about acquiring regional food stores
  • J.C. Penney reports 1Q prelim. sales drop below ests.
  • Walt Disney 2Q adj. EPS, revenue beat estimates
  • Electronic Arts projects annual profit exceeding analyst ests.
  • WebMD’s CEO Redmond steps down as co. raises sales forecast
  • Toyota forecasts profit will rise to 6-yr high on weaker yen
  • China export gains spur doubts as U.S., Europe shipments fall
  • Berkshire agrees to limit DaVita stake after weighing increase
  • China’s CNPC said in talks to buy Brazil’s Barra for $2b
  • Apple seeks documents on Android source code in Samsung lawsuit
  • Bristol-Myers sues Genentech claiming “Cabilly” patents invalid
  • Tom Mockridge is named CEO of Virgin Media on Liberty deal
  • Ackman, Einhorn, Eisman to speak at Ira Sohn conference


    • Calfrac Well Services (CFW CN) 6am, C$0.50
    • Susser Holdings (SUSS) 6am, $(0.05)
    • Lamar Advertising (LAMR) 6am, $(0.03)
    • Cognizant Technology Solutions (CTSH) 6am, $0.93
    • Calumet Specialty Products (CLMT) 6:30am, $1.03
    • Franco-Nevada (FNV CN) 6:30am, $0.27
    • Starwood Property Trust (STWD) 6:45am, $0.46
    • Intact Financial (IFC CN) 6:55am, $1.32
    • CommonWealth REIT (CWH) 7am, $0.73
    • Wendy’s (WEN) 7am, $0.03
    • Enbridge (ENB CN) 7am, C$0.52
    • AOL (AOL) 7am, $0.45
    • Genivar (GNV CN) 7am, C$0.35
    • Huntington Ingalls Industries (HII) 7:15am, $0.85
    • Sodastream (SODA) 7:30am, $0.65
    • Geo Group (GEO) 7:30am, $0.38
    • Tim Hortons (THI CN) 7:30am, C$0.61
    • Cedar Fair (FUN) 7:35am, $(1.20
    • Brookfield Renewable Energy  (BEP-U CN) 8am, $0.17
    • Vivus (VVUS) 8:15am, $(0.52)
    • Allete (ALE) 8:25am, $0.75
    • Liberty Interactive (LINTA) 11:45am, $0.19
    • News Corp (NWSA) 4pm, $0.35 - Preview
    • Linamar (LNR CN) 4pm, C$0.60
    • Cousins Properties (CUZ) 4pm, $0.12
    • Green Mountain Coffee Roasters (GMCR) 4pm, $0.73
    • Tower Group International (TWGP) 4pm, $0.53
    • Groupon (GRPN) 4pm, $0.03
    • Quebecor (QBR/B CN) 4pm, C$0.61
    • Rackspace Hosting (RAX) 4pm, $0.20
    • Quantum (QTM) 4:01pm, ($0.01)
    • St Joe (JOE) 4:01pm, $(0.01)
    • Sunoco Logistics Partners (SXL) 4:01pm, $0.82
    • MarkWest Energy (MWE) 4:01pm, $0.26
    • Polypore International (PPO) 4:01pm, $0.41
    • Tumi (TUMI) 4:01pm, $0.15
    • MBIA (MBI) 4:01pm, $0.15
    • Andersons (ANDE) 4:01pm, $0.87
    • J2 Global (JCOM) 4:03pm, $0.65
    • Tesla Motors (TSLA) 4:03pm, $0.04 - Preview
    • CenturyLink (CTL) 4:04pm, $0.68
    • Activision Blizzard (ATVI) 4:05pm, $0.11 - Preview
    • Monster Beverage (MNST) 4:05pm, $0.46
    • Dealertrack Technologies (TRAK) 4:05pm, $0.26
    • Clean Energy Fuels (CLNE) 4:05pm, $(0.06)
    • SemGroup (SEMG) 4:05pm, $0.36
    • Shutterstock (SSTK) 4:05pm, $0.16
    • McDermott International (MDR) 4:10pm, $0.14
    • Corrections of America (CXW) 4:10pm, $0.48
    • Finning International (FTT CN) 4:14pm, C$0.47
    • Veresen (VSN CN) 4:14pm, C$0.05
    • Schweitzer-Mauduit International (SWM) 4:15pm, $0.92
    • CF Industries Holdings (CF) 4:15pm, $6.00
    • Oiltanking Partners (OILT) 4:15pm, $0.41
    • Hawaiian Electric Industries (HE) 4:15pm, $0.38
    • RLJ Lodging Trust (RLJ) 4:25pm, $0.37
    • Fifth Street Finance (FSC) 4:41pm, $0.28
    • Regency Energy Partners (RGP) 4:45pm, $0.03
    • Liberty Media (LMCA) 4:45pm, $0.41
    • Energy Transfer Partners (ETP) 4:53pm, $0.46
    • Transocean (RIG) 4:56pm, $0.99 - Preview
    • (CTRP) 5pm, $0.24
    • American Financial (AFG) 5pm, $0.83
    • Home Capital Group (HCG CN) 5pm, C$1.67
    • Atlas Energy (ATLS) 5pm, $(0.01)
    • Atlas Resource Partners (ARP) 5pm, $0.23
    • Sun Life Financial (SLF CN) 5:10pm, C$0.66
    • Energy Transfer Equity (ETE) 5:10pm, $0.53
    • EPAM Systems (EPAM) 5:40pm, $0.34
    • Alon USA Energy (ALJ) 5:45pm, $0.55
    • Continental Resources (CLR) 5:48pm, $1.14
    • Granite REIT (GRT-U CN) 5:51pm, $0.69
    • Tronox (TROX) 5:56pm, $(0.21)
    • Quad/Graphics (QUAD) 6:30pm, $0.15
    • Crosstex Energy (XTEX) 7pm, $(0.25)
    • Delek US Holdings (DK) 11pm, $1.18
    • Middleby (MIDD) Aft-mkt, $1.31
    • Trican Well Service (TCW CN) Aft-mkt, C$0.18
    • Northland Power (NPI CN) Aft-mkt, $0.06
    • Alon USA Partners (ALDW) Aft-mkt, $1.44
    • Calloway REIT (CWT-U CN) Aft-mkt, C$0.45
    • Northern Property REIT (NPR-U CN) Aft-mkt, C$0.50


  • Iron Ore Seen Dropping by BHP as Supply Growth Tops Demand
  • KKR to Goldman Breach Decade-Long Water Deal Dam: Commodities
  • Gold Rises in New York Amid Signs of Physical Demand in China
  • Copper Rises in New York After Gains in China Signal More Demand
  • Gold Assets in Fund Paulson Holds Decline to Four-Year Low
  • China’s Gold Purchases From Hong Kong Expand to Record in March
  • Sugar Declines on Brazilian Harvest Progress; Coffee Retreats
  • Rebar Advances After China’s Trade Performance Beats Estimates
  • Gold Eroding Farmer Collateral May Boost Defaults: India Credit
  • Carbon Rout Roiling Australia as Polluters Win: Energy Markets
  • China Copper Imports Drop 21.1% Yoy as Demand Slows: BI Chart
  • Copper Consumers Seen by Boliden Holding Very Low Stockpiles
  • Fed Panel Warned of Farmland Bubble Amid Increasing Credit Risk
  • Gold Imports by India Seen Topping 100 Tons for a Second Month






















The Hedgeye Macro Team











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Arrow Points Up

This note was originally published at 8am on April 24, 2013 for Hedgeye subscribers.

“Entropy is time’s arrow.”

-Arthur Eddington


That’s not a new reality. But it’s always an important one to remember. Arthur Eddington was the British astrophysicist who first called entropy “time’s arrow” in his 1927 book, The Nature of the Physical World.


You don’t have to be a physics guru to understand the concept of entropy. The 2nd law of thermodynamics calls entropy the price paid by an ecosystem when energy changes. I love applying that thought to markets – particularly when they are undergoing phase transitions.


“The rates of change of entropy differs for each specific event. All the while the rate of change of time itself is taken to be uniform, ceaseless, and non-negotiable.” (Chaisson, Cosmic Evolution, pg 31)


Back to the Global Macro Grind


Moving fast, and slow. That’s what markets do. If you could have a signal to probability weight that the market’s entropy is about to change fast, you’d take it. Or at least I would. Some signals really matter.


One of the most basic relationships in a market is expected price versus volatility. The key word is expected. The two factors (price and volatility) have to be contextualized across multiple durations.


With those thoughts in mind, let’s look at the price of the SP500 vs front-month US Equity Volatility (VIX):

  1. SP500 is in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  2. VIX is in a Bearish Formation (bearish TRADE, TREND, and TAIL)

Three days ago, points 1 and 2 were not true:

  1. SP500 was bearish TRADE (below 1557)
  2. VIX was bullish TRADE (above 14.82)

In between now and then, you were allowed to make a risk managed move (buy and/or cover) on the explicit signal (SPX breaking out, back above 1557, and VIX breaking down through 14.82). You were also allowed to ignore my signal. It’s a free world, sort of.


I rarely ignore my signal.


Obviously I am simplifying this basic relationship between expected price/volatility. I can front-run the gotcha guys who will say that using front-month VIX instead of the implied term-structure of volatility’s curve is a mistake. But why is it if the signal works?


Mixing theory with practice is a dangerous game. You don’t have to take my word for it on that – try it with your own money at home. Some have mathematical theories. Some have qualitative theories. There’s a lot of baggage in theories that don’t embrace change.


My sense is that consensus still isn’t bullish enough on the SP500. My sense is that consensus isn’t bearish enough on US Equity Volatility. But, to be clear, my senses aren’t based on how I feel. My sense is my signal.


What is the most probable path that consensus considers improbable this morning?

  1. SP500 going to 1603
  2. VIX dropping to 10.97

Do you disagree with that? Why?


On Thursday (last week) at 3PM EST here’s where the market was:

  1. SP500 = 1538
  2. VIX = 18.16

This morning:

  1. SP500 = 1578
  2. VIX = 13.48

The context of this 3-day move (across durations) matters. Intermediate-term TREND support for the SP500 (1515) wasn’t violated on the downside inasmuch as intermediate-term TREND resistance for the VIX (18.89) didn’t break-out on the upside.


Should there be a difference between how you feel about a market when volatility drops 25% in a straight line? Should you make decisions based on feelings? Or should you re-model what’s becoming more or less probable for different expected price and volatility parameters?


I’m asking too many questions this morning. And I apologize for that. Maybe I should have just written a one sentence Early Look that said my model is signaling an up arrow for the SP500, and a down one for VIX to 1603 and 10.97, respectively.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1286-1454, $96.68-104.06, $82.47-83.19, 97.27-101.31, 1.68-1.80%, 10.97-14.82, and 1557-1603, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Bucked Up!

“I feel quite bucked up!”

-George F. Kennan


I’m half way through reading John Lewis Gaddis’ biography of this great American strategist’s life. The aforementioned quote came from Kennan in 1947 (Gaddis, pg 242). He was 43 years old at the time and was just coming off one of the biggest wins of his career – shifting US foreign policy towards Russia in what is well known by historians now as “The Long Telegram.”


Kennan’s character resonates with me because he was quite a moody fellow. He was authentic. He thought for himself and didn’t particularly care about what people thought about him. While he didn’t make as many mistakes as I have at his age, he was still very introspective about his research process. He never stopped questioning himself or his premise.


Whether you are a strategist, athlete, or professional in any other field where performance is measurable in real-time, you get it. Performance is fleeting. As a result, conventional wisdom suggests you should always err on the side of caution when things are going well. I disagree with that. Confidence is contagious. Seize it when you have it. Make as much progress as you can.


Back to the Global Macro Grind


As the SP500 was holding all-time highs into yesterday’s close, I was feeling rather bucked up myself. It is, after all, all about #StrongDollar. When the US Dollar Index was basing in mid-November (at $79-80), that was our signal. We’ve seen higher (all-time) lows in the Dollar and lower-highs in Commodity prices ever since.


There’s measurable entropy in something that’s rising off a 40yr low (USD hit an all-time low in 2011 when Commodities (CRB Index) hit an all-time high). It’s critical to contextualize the asymmetry associated with that entropy. Remember, long-term bottoms are processes, not points. By the time everyone and their brother is bucked up on #StrongDollar, we’ll be getting out of the way.


The good news (if you are Long Dollars, Short Commodities, and Long US Consumption stocks) is that we are still in the early innings of what could be a long telegram of Early Look notes anchoring on this fundamental point. So, please – I beg you to be patient with both our thesis and the American recovery in confidence, birth rates, and household formation. It’s all born out of the same thing.


What’s up since the US Dollar gave us the green light (quant signal) in November 2012?

  1. SP500 is +20% now (vs 1353 on November 15th, 2012)
  2. Weimar Nikkei is +65% (vs 8661 on November 15th, 2012)

Yep, Bernanke spent the 1st half-decade of his reign as USA’s Central Planner In Chief (2007-2012) Burning The Buck. Ever since his epic “print to infinity and beyond” moment (SEP 2012 FOMC meeting), the Japanese dudes have taken the torch.


Everything in currency markets is relative. On the margin, former BOJ Chief (Shirakawa) was actually the most hawkish of the Big 3 Central Currency Commanders going back to 2006. That’s what most guys who got squeezed being short Yens to 40yr highs in 2011-2012 had wrong. To get the timing right in big currency moves, you need to get the relative policy shifts right.


Again, this is just how we roll. So if our GIP (Growth, Inflation, Policy) framework sounds a little foreign to some, that’s cool too. Don’t forget that we did the unthinkable here and thought for ourselves in building our models and macro strategies this way.


Back to 1-month CTRL+SQUEEZE move in everything Global Equities this morning…


Here are 3 big things jumping out of my notebook:


1.   CHINA – just as it looked like Chinese stocks were going to hell in a hand basket again, China joins the party printing a +14.7% Export print for April; it’s not just the US data that has accelerated sequentially m/m – most of the Asian and European data stopped slowing in March too; Shanghai Comp +4 days in a row, back above 2206 TREND support to 2246


2.   COMMODITIES – SP500 +0.5% yesterday w/ the CRB Index deflating -0.4% (-2.4% YTD); #CommodityDeflation remains the outlier call of 2013; it is bullish for inflation adjusted consumption growth (particularly US #GrowthAccelerating). Will Oil start to look like Gold does next? Prices at the pump falling Q2 vs Q1 for the first time in 4 years


3.   SP500 – 1 is not where you want to be chasing US stocks; you have -1.4% of immediate-term downside to my 1st line of support (1599); that said, higher-lows and higher all-time highs in my model are what you want to be net long of, unless you have a bearish catalyst


As I have been asking my sparring partners Doug Kass and Dennis Gartman since January, what is your bearish catalyst? Will it be a reversal of last week’s raging bull catalyst (US Jobless Claims dropping to 324,000, a 5 year low)? Since we’ve ripped for 4 consecutive up days since that data point, I wouldn’t be surprised if we sold off on it being less great this week (Thursday).


Who knows? And, if it’s legal, what is it they know? All I know is that the more I read about history and repeatable market strategies, the less I know altogether. The only thing I am 100% certain about is that I will be getting something very wrong soon. That’s just the game. In the meantime, I’ll play it confidently. That’s the only way to win.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Shanghai Composite, and the SP500 are now $1, $99.36-106.11, $81.87-92.98, 98.25-99.98, 1.71-1.82%, 12.36-14.51, 2169-2265, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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