US Strategy – Owning up to higher interest rates

On Tuesday, the S&P 500 closed at 1,091, down 0.6%.  While yesterday was a down day on accelerating volume, the S&P 500 held support and remains positive on both TRADE and TREND. 

Yesterday’s weakness was consumer related.  On the MACRO front housing starts rose 0.5% month-to-month in September to a 590,000 unit annualized pace, while consensus expectations were for a 610,000 rate.  Importantly, building permits, a leading indicator for construction activity, fell 1.2% month-to-month to a 573,000 annualized rate vs. consensus expectations of 595,000. Coming into the day we were short the XHB, as housing-related stocks came under pressure, with the XHB (2.3%).  We covered our short on the XHB, but remain cautious on housing in general. 

As an industry, the homebuilders are in the business of building new homes, which helps to support the nation’s economy.  Unfortunately, the bottom line is that we don’t need any more new homes.  Using data from the Mortgage Bankers Association, there are more than 7 million homes that are in some state of distress.  Given the pace of new homes being built, the current inventory of unsold homes and the potential number of homes that are in distress is likely to increase. Put simply: the housing overhang is here to stay. 

The earnings onslaught continued this morning and last night with Morgan Stanley, Boeing, Freeport McMoran and Yahoo.  From the Research Edge perspective, the Yahoo earnings report (stock currently up 5% pre-market) was another feather in Rebecca Runkle’s cap as earnings were better than expected at $0.13 versus $0.07 for the quarter.  Another notable call out is Freeport McMoran, which is the world’s largest copper miner and reported earnings of $2.07 versus $1.31 in the year ago quarter.  This earnings report is important in that it is a leading indicator of our reported inflation increasing in Q4, as compares for many commodities year-over-year are setting up to be very easy, which will spike reported inflation.

Other portfolio activity included buying Utilities (XLU), the Canadian dollar (FXC) and Adobe (ADBE).  We also shorted the US Dollar (UUP).  

On the positive side 80% of the S&P 500 is beating analyst expectations, with another fairly upbeat showing yesterday from AAPL, CAT, TXN, and UNH. 

The momentum behind the “currency creditability crisis” waned as the UUP was up 0.4%.  The VIX declined 2.7%. 

Yesterday, only two sectors (XLP and XLK) outperformed the S&P 500 and every sector was down on the day.  The three best performing sectors were Consumer Staples (XLP), Technology (XLK) and Energy (XLE), while Utilities (XLU), Consumer Discretionary (XLY) and Materials (XLB) were the bottom three. 

Yesterday, the Materials (XLB) was the worst performing sector.  There were a number of factors behind the underperformance of the Materials sector yesterday, though much of the focus appeared to be on the dollar rally.  Gold stocks were among the worst performers and DuPont weighed on the diversified chemicals stocks. 

Today, the set up for the S&P 500 is: TRADE (1,083) and TREND is positive (1,003).   Day 8 of perfection - the Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 9 of 9 sectors are positive from the TRADE duration.         

The Research Edge Quant models have 1.5% upside and 1% downside in the S&P 500.  At the time of writing the major market futures in the U.S. are lower.

The Research Edge MACRO team.

US Strategy – Owning up to higher interest rates - S P500

 

US Strategy – Owning up to higher interest rates - s pperf

US Strategy – Owning up to higher interest rates - s plevels