US STRATEGY – EASY COME, EASY GO

 

On Friday the UUP, which is the etf for the U.S. dollar index, was up 0.6%, putting the dollar back above the TRADE line.  As a consequence the S&P 500 got smoked closing at 1,036, down 2.8% on the day.  The S&P 500 has closed down four out of the five trading days last week and closed down 4% on the week. 

 

On a thematic basis last week’s decline was due to a move out of riskier assets and those sectors levered to an economic recovery and the U.S. Dollar underperformed the most; Financials, Energy and Materials were the worst performers last week. 

 

The return of the risk trade was more obvious, as the VIX rose 23.9% on Friday and 37.8% last week. Given the strength in the economy it’s rational to expect a slightly more hawkish tone out of this Wednesday's FOMC meeting. On the MACRO front, the Chicago PMI improved to 54.2 in October from 46.1 in September, ahead of consensus expectations of 49 and the highest level since September of 2008.

 

On Friday, the Financials were the worst performing sector, after posting their biggest one-day rally since July 13th the day before.  Life insurance companies and rumors about CIT and other riskier names were the big pressure points.  This morning CIT officially opted to seek court protection via bankruptcy.  Common stock holders will be mostly wiped out and the U.S. Treasury Department has indicated they won’t recoup much, if any, of their $2.3BN investment.   The lender funds roughly 1 million businesses (including some professional hockey teams!), so arguably this resolution may lead to loosening of credit, on the margin.

 

Capital markets activities softened last week as IPOs performed both poorly and, in the case of AEI, were postponed.  Both RailAmerica and Select Medical, which are private equity portfolio companies, reduced their offerings.  While AEI, which is a former unit of Enron, pulled it’s offering entirely.  With $4.2BN of private equity sales in the pipeline, there looks to be a future overhang of stock on the market and on private equity portfolios alike.

 

On Friday, Material (XLB) and commodity equities also underperformed with the dampened momentum surrounding the economic recovery theme and the accompanying strength in the dollar.  In the energy sector, E&Ps suffered their biggest one-day loss since June 22nd.

 

The three best performing sectors were Healthcare (XLV), Consumer Staples (XLP) and Utilities (XLU); all three sectors were the relative outperformers today with the defensive rotation in the market.  Although, it should be noted that all of sectors were down on the day. 

 

Today, the set up for the S&P 500 is: TRADE (1,031) and TREND is positive (1,021).   The Research Edge quantitative models have 6 of 9 sectors in the S&P 500 positive on TREND and 0 of 9 sectors are positive from the TRADE duration.  Materials, Financials and Utilities are all broken on both durations.  This is the first time since March 2009 that any sector was broken on both durations. 

 

The Research Edge Quant models have 2.5% upside and 0.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open up small to the upside. 

 

The Research Edge MACRO Team.

 

 

US STRATEGY – EASY COME, EASY GO  - S P500

 

US STRATEGY – EASY COME, EASY GO  - s pperf


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