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US STRATEGY – Burn Buck Burn

The S&P 500 has been up for five days in a row, rising 0.3% on Friday.  While a weaker-than-expected October employment report pressured the market early on, although the S&P 500 spent most of the day around the unchanged level.  

Friday’s nonfarm payrolls fell 190,000 in October vs. consensus expectations for a 175,000 decline; there was a net upward revision of 91,000 for the prior two months. In addition, the average work week held at a record-low 33 hours. The unemployment rate rose 40 bps to a 26-year high of 10.2%, fueled by a 589,000 drop in the household survey following declines of 785,000 in September and 392,000 in August.  The positive news came in the form of a better-than-expected 0.3% increase in average hourly earnings and a 34,000 gain in temporary employment.

At this stage of the current cycle the labor market is widely expected to be a longer-term recovery overhang, which will be the economic factor allowing the Fed to keep interest rates at all time lows and money free.  This Burning of the Buck has the perverse implication of strengthening U.S. equity markets, to a point.

Last Friday the VIX fell 4.9%, now falling for the fifth straight session.  In the past week the VIX fell 21.2% after spiking nearly 38% two weeks ago.

The three best performing sectors were the Industrials (XLI), Consumer Discretionary (XLY) and Materials (XLB).  The XLI outperformed, with the bulk of the strength coming from GE, which benefited from the sell-side getting more bullish.  The Transports also seemed to benefit from the recent decline in oil prices. 

The Consumer Discretionary sector was up due to stronger retail names.  Bank America upgraded the home-improvement retailers LOW and HD, while JPMorgan upgraded Macy’s.  AMZN also benefited from an upgrade at Bernstein. The second best performing name was SBUX on the back of better-than-expected 09Q4 earnings and 2010 guidance. The housing stocks were higher after Credit Suisse jumped on the bandwagon.

The worst performing sectors were Utilities (XLU), Energy (XLE) and Financials, all three sectors were down on the day.  The Financials were the worst performing sectors although it was up big on Thursday.  Consumer credit trends and the worse-than-expected October employment data seemed to be the biggest concerns, especially as it relates to the timing of a peak in the write-down cycle.

Today, the set up for the S&P 500 is: TRADE (1,065) and TREND is positive (1,030).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 6 of 9 sectors are positive from the TRADE duration.  Consumer Staples is the only sector positive on both durations and the Financials broke TREND. 

The Research Edge Quant models have 1% upside and 3.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open up, with the U.S. Dollar down versus most major currencies.  We will be selling the strength domestically.  The Buck Burning is good, to a point.

The Research Edge MACRO Team.

US STRATEGY – Burn Buck Burn - S P500

US STRATEGY – Burn Buck Burn - s pperf