US Strategy – Volatility, Take Two

On Tuesday, the S&P 500 closed at 1,063, down 0.3%.  Yesterday’s was the third down day in a row for the S&P 500 and it finally broke the trade line.  The heightened volatility continued yesterday with the VIX up 2.1% yesterday and has now moved 18.8% in the past week.       

On the MACRO front, the drag on the market seemed to be the weaker-than-expected October Consumer Confidence data. For now, Consumer Confidence continues to make a series of lower-highs (see the chart in our post from yesterday). Americans are not as stupid as Washington thinks they are. The Conference Board’s index of Consumer Confidence fell to a three-month low of 47.7 from 53.4 in September.

Yesterday, the Case-Shiller report showed that the composite index of home prices in 20 metropolitan areas rose 1.2% month-to month in August, above the consensus estimate of a 0.7% increase.  The magnitude of the increase, however, declined on a sequential basis for the first time in four months.  In July, the index improved 1.6% month-to-month.  Nonetheless, the rate of annual decline in home price values continues to improve. 

The question about whether these trends will continue to show sequential improvement rests on the upcoming November 30 expiration of the government's $8,000 tax credit for first-time home buyers.  Also impacting these housing numbers are the anticipated higher unemployment rates through year-end and the apparent trend toward lower consumer confidence numbers, which was more evident today following the disappointing conference board reading. 

These issues, coupled with a new wave of foreclosures hitting the housing market in early 2010, suggest that the improvement in pricing trends are sure to slow down and may even begin to deteriorate further.

Yesterday, four sectors outperformed the S&P 500 and three sectors were positive on the day.   The three best performing sectors were Energy (XLE), Healthcare (XLV) and Consumer Staples (XLP), while Industrials (XLI), Consumer Discretionary (XLY) and Materials (XLB) were the bottom three. 

The Energy sector was the best performing sector despite the pick-up in risk aversion and dollar strength.  Also helping performance was better-than-expected earnings and cost-savings guidance from BP. 

Managed care rallied today with the HMOs up 3.7%, following a decline of 2.7% yesterday.  Healthcare reform continues to be a major headwind for the group. 

Today, the set up for the S&P 500 is: TRADE (1,060) and TREND is positive (1,015).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 3 of 9 sectors are positive from the TRADE duration.  The only sectors positive on both durations are Energy, Technology and Consumer Staples.     

The Research Edge Quant models have 2% upside and 1.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open to the down side. 

The Research Edge MACRO Team.

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