WATCH THE BOUNCES

Client Talking Points

VIX

Risk happens slowly, then all at once - front month VIX went from its long-term asymmetry point (buy it at 10!) to immediate-term TRADE overbought yesterday after crashing (to the upside) on a +24% four-day move. Risk range for VIX is now 10.32-12.67, so use that as a beta backboard.  

RUSSELL 2000

Russell 2000 is both below our TREND resistance line of 1173 and DOWN for 2014 YTD (bull market). Its risk range is now 1155-1173; above 1173 bullish; below it bearish – with a lot of emotion in between.

EUROPE

We learn a lot more from the bounce than the breakdowns – and this morning’s European Equity bounce is rather pathetic; DAX and FTSE only +0.2-0.3% and are now both trading below TRADE and TREND lines; Portugal is +2% but would need to be up another 1,000 points on the PSI 20 to recapture TREND support.

Asset Allocation

CASH 16% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 20%
FIXED INCOME 26% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

GOLD: not giving it back to the bears this morning - and I like that = +11.1% YTD

@Keith McCullough

QUOTE OF THE DAY

“A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.”

- John F. Kennedy

STAT OF THE DAY

The Japanese Nikkei has been down every day this week and is down -6.1% year-to-date.