US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE?

WHAT A DAY! - The S&P rallied 1.2% yesterday; the DOW was up 1.2%, the NASDAQ up 1.5% and the Russell 2000 up 1.6%. The strength was broad based with every sector outperforming the S&P 500 except for the Financials (XLF), which was down for most of the day. 

 

The MACRO calendar benefited the RECOVERY trade, which dominated the mood of the market yesterday.  The reality is that the SAFETY trade outperformed.  The best performing sector was Materials (the RECOVERY trade), but Utilities and Healthcare outperformed too, which suggests a flight to safety.  In addition, the underperformance of the Financials suggests a move away from RISK.  

 

That being said, the market’s upward momentum was driven by data from the manufacturing sector, which was a key driver for the RECOVERY theme.  Over night the focus was on China, where the manufacturing sector expanded for a ninth straight month in November.  In the US, the manufacturing sector expanded for a fourth straight month in November.  Some additional support came from the 3.7% month-to-month increase in October pending home sales, which marked the ninth consecutive monthly gain and pushed the index to its highest level since March of 2006.  As a result, the XHB +2.2% (the homebuilder ETF), outperformed the S&P 500.

 

The appetite for risk accelerated with the VIX down 10.6% on the day.  The potential for a Dubai contagion is slipping into the past as the dollar sold off 0.69% to 74.36 yesterday.  The “broken buck” continues to have favorable implications for the RECOVERY trade as the Materials (XLB) was the best performing sector on the day, up 1.9%.  Within the XLB the outperformance was driven by steel, copper, aluminum, and paper and forest product names. 

 

As I mentioned above, yesterday every sector outperformed the S&P 500 except the Financials (XLF).   The Financials have been chronic underperformers over the past three months and over the past 5 trading days are down 0.2% versus the S&P up 0.3%.  The XLF continues to underperform despite the better-than-expected economic data and an increased appetite for risk.  Dragging the XLF down are the larger names in the index like JPM, GS, C and AXP.  What’s wrong with the XLF?

 

From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 35 points or 1% upside and 2.5% downside.  At the time of writing the major market futures are trading slightly lower.

 

Crude is trading down today after the American Petroleum Institute reported crude inventories rose 2.89 million barrels last week, while gasoline and distillate fuel stockpiles also climbed.   The Research Edge Quant models have the following levels for OIL – buy Trade (75.31) and Sell Trade (78.69).

 

Gold climbed as much as 1.4% to a record $1,213.88 per ounce in Singapore. The Research Edge Quant models have the following levels for GOLD – buy Trade (1,170) and Sell Trade (1,224).

 

Copper fell in London trading, erasing an earlier gain to more than a 14-month high.  Copper for three-month delivery on the London Metal Exchange fell 0.1% to $7,068 a metric ton.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.08) and Sell Trade (3.23). 

 

Howard Penney

Managing Director

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - sp1

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - usdx2

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - vix3

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - oil4

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - gold5

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - copper6

 


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