Gareth: If you’re so clever, what am I thinking now?
Tim: You’re thinking "how can I kill a tiger armed only with a biro?"
Tim: You’re thinking "if I crash land in a jungle will I be able to eat my own shoes?"
Gareth: No. And you can’t
Tim: What are you thinking Gareth?
Gareth: I was just wondering whether will there ever be a boy born who can swim faster than a shark.
-Excerpt from the British version of The Office
In the Early Look, Keith led with a quote from the well known British comedy Benny Hill. Given that it is British Comedy day at Research Edge, we’ve led with a quote from The Office. Similar to Gareth we have some questions. For example, is there a market that can continue to swim faster than its declining currency?
The S&P 500 has been up for six days in a row, rising 2.2% on Monday. Yesterday’s rally was driven by the heightened appetite for RISK and the REFLATION trade following the G20 meeting over the weekend. Despite its importance as the world currency reserve the G20 leaders refrained from addressing the weakness in the U.S. dollar. Without any active support from the world’s leaders, the dollar index closed down nearly 1%, to its lowest level since August 2008. As we know, that decline in the U.S. dollar foreshadowed a dramatic decline in the stock market in the Fall of 2008. While we certainly do not adhere to single factor models, this decline in the U.S. dollar is a major red flashing light currently for U.S. equities. As a result, we have raised cash in our asset allocation model to the highest level since July 1, 2009.
The heightened momentum behind the REFLATION trade helped many of the usual suspects outperform yesterday. The three best performing sectors were the Industrials (XLI), Financials (XLF) and Materials (XLB). The Financials were the best performing sector, up 3.6% on the day. There was no one catalyst for the strength other than U.S. dollar weakness.
The Materials rose 3.3% yesterday, and notable gainers included the metals and mining stocks and paper and forest products. In the industrials sector, E&Cs and machinery stocks did the best.
The worst performing sectors were Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP). Managed care stocks finished higher for a sixth straight session today with the HMO leading the way. The performance came despite the fact that the House approved its version of healthcare reform legislation this weekend.
Homebuilders are poised for a positive day today as Beazer Homes reported a fourth-quarter profit. The Company reported “some moderation” in weak market trends. New home orders rose 2.4% from a year ago, and cancellation rate improved from 34.7% to 46.3%. In the pre-market the stock was up 7%.
Today, the set up for the S&P 500 is: TRADE (1,067) and TREND is positive (1,032). The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 8 of 9 sectors are positive from the TRADE duration. Financials are the only sector not positive on both durations.
The Research Edge Quant models have 0.5% upside and 2.5% downside in the S&P 500. At the time of writing the major market futures are poised to open up small to the downside.
The Research Edge MACRO Team.