US STRATEGY – OUCH!

The first lesson I learned in this business was “don’t fight the Fed!”  Oh how quickly we forget some simple but important lessons about the market.  Don’t let the facts get in the way of a great bull run.  The bears are getting run over and it’s painful.   

 

Yesterday, the S&P 500 finished higher by 1.5% and closed at a new year to date high – that is bullish.  For the month the S&P 500 is up 7.1%.  Stocks moved higher on the back of the RECOVERY trade as the global stimulus flag is being carried around the world.  This current market dynamic is exacerbating the weakness in the dollar.  In addition, Fed Chairman Bernanke, who specifically addressed the dollar weakness yesterday in NYC, reiterated that “economic headwinds will dampen the pace of recovery and mandate an extended period of low interest rates.”

 

As you would expect, dollar weakness contributed to the outperformance of Energy (XLE), Materials (XLB) and Industrials (XLI); the three best performing sectors on the day.  On the MACRO front, the market benefitted from the headline retail sales number, while the Retail sales less Autos was 0.2% versus the consensus of 0.4%. 

 

The Dollar index (DXY) closed down 0.58% yesterday and the VIX declined by 2.0% on the day.

 

While every sector was up on the day, the three worst performing sectors were Financials (XLF), Healthcare (XLV) and Consumer staples (XLP). While the XLF lagged the overall market, the banking stocks snapped a two-day losing streak.  Citigroup rallied +3.2% on the news that John Paulson had taken a stake.   Credit-card stocks all rallied after reporting declines in net charge-offs in their October master trust data.  Despite the dampened risk aversion in the market, the bulk of the mortgage insurance names remained under pressure yesterday.

 

Consumer Discretionary (XLY) outperformed slightly, up 1.6% on the day. As I said above, October retail sales rose a better-than-expected 1.4%, though excluding autos, sales were up just 0.2% vs expectations for a 0.4% gain.  That said, the 0.2% ex-auto sales number represents three straight months of improvement, but down from the revised 0.8% (revised down from 1.1%) in August. 

 

Today, the set up for the S&P 500 is: TRADE (1,084) and TREND is positive (1,041).   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.  The Financials (XLF) is the only sector broken on the TRADE duration. 

   

The Research Edge Quant models have 1% upside and 2% downside in the S&P 500.  At the time of writing the major market futures are poised to open down small.   

 

Howard Penney

Managing Director

 

US STRATEGY – OUCH! - sp11 17

 

US STRATEGY – OUCH! - svchart

 


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