US STRATEGY – NOT PERFECTLY PERFECT

According to the Research Edge quant models, the XLU was the first sector in three days to break TRADE.

In early trading the futures are unchanged ahead of the non-farm payroll number.  On the margin we are going to be bullish on the jobless numbers and the unemployment rate for the foreseeable future.  

With the exception of the NASDAQ, every major Index finished mostly higher on Thursday, with the S&P up 0.40% for a fourth straight session. No matter what seems to be thrown at this market it does not want to go down.  Yesterday, the market was able to shrug off a decline in China’s equity market on news of tighter credit and a bounce in the dollar.  Although, those sectors that closely aligned to the RECOVERY trade – Energy and Materials - underperformed yesterday. 

On the MACRO calendar initial claims rose to 434,000 in the week-ended January 2nd from 433,000 in the prior week. The increase was a bit better than the consensus, which was looking for claims to rise to 439K. The four-week moving average fell to 450K from 461K, the lowest level since September of 2008.  The December employment report will be released shortly and according to a Bloomberg survey, the consensus is looking for an unchanged reading following an 11,000 decline in November. The unemployment rate is expected to hold steady at 10%.

As I said yesterday in a note to clients, the question now is not are we going to see 11-12% unemployment but how quickly does it go to 9%.  In the short-term expectations are for unemployment at 10.1%, and that is still too high, especially for 1H10.  Referring to Josh Steiner's note on the census hiring this year, the government is going to add 1.2 million job additions in this country in the next 3-4 months.  Yes they are short term jobs but they are going to be in the reported data and unless you submit that weekly jobless numbers and monthly unemployment numbers don't matter, how they are accounted for MATTERS.

For the second time this week the Financials (XLF) has been the best performing sector.  The rally in the bank stocks continued today with the BKX up +4.1% yesterday and 9.9% for the week.  Yesterday, BKX had its biggest one-day gain in almost six months.   Our Financials analyst Josh Steiner penned a note yesterday on the XLF saying that “Senator Chris Dodd's (D-CT) announced resignation yesterday morning is a positive catalyst for the XLF as his departure casts further doubt around the financial regulatory overhaul process now underway.”  Regional names that underperformed last year continued to drive the group higher, with ZION +11.2%, HBAN +11.1%, RF +8.8% and MI +8.7% among the best performers.

After big outperforming in 2009, Technology (XLK) is one of two sectors that are down so far in 2010.  Memory names which started the week stronger, weighed on the semiconductors yesterday with the SOX (1.1%).  The software group remained for sale with the S&P Software Index down 0.7%.  We continue to be SHORT MSFT in the virtual portfolio. 

The third best performing sector yesterday was the Consumer Discretionary (XLY).  The XLY benefited from retailers as the S&P Retail Index +0.8%; its biggest gain thus far this year.   Notable gainers included TJX + 5.1%, ROST + 4.1%, JWN + 4% and M +2.3%, all of which reported better-than-expected comps and raised Q4 guidance. In addition, SHLD increased 11.6% as it guided its Q4 EPS meaningfully above the Street, while a Research Edge favorite BBBY increased 6.9% on earnings/guidance.

The range for the S&P 500 is 15 points or 0.5% (1,145) upside and 1.0% (1,130) downside.  At the time of writing the major market futures are trading flat on the day.    

Copper fell for a second day in London on speculation that demand may slow as China moves to end economic-stimulus measures.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.37) and Sell Trade (3.50).

In early trading today Gold is down for the second day in a row as a stronger dollar curbed demand for the metal as a hedge against weakness in the currency.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,087) and Sell Trade (1,137).

Crude oil is trading little changed around $82.54 a barrel in New York, heading for its fourth weekly increase as the cold weather remains a factor.  The Research Edge Quant models have the following levels for OIL – buy Trade (80.38) and Sell Trade (83.96).

Howard Penney

Managing Director

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