US STRATEGY – EASY NEVER MEANS IT’S EASY

The MACRO calendar in the USA has been very light over the past two days and earning season did not get kicked off until last night.  Until AA performance last night, consensus expectation for the upcoming earnings season was upbeat, especially given the easy comparisons.  While comparisons are easy, expectations have increased too.  That means it’s never really EASY, as it’s always hard to live up to expectations!     

 

While the S&P 500 is up for six straight days, overall yesterday performance can be better characterized as mixed with volume very light as the breadth of the market continues to narrow. 

 

Volatility is getting crushed here in early 2010.  The VIX declined 3.2% yesterday and is down 19% so far this year.  As we said yesterday in a note to clients the VIX is in what we call a Bearish Formation. That’s when the long term TAIL sits above the intermediate term TREND; and the intermediate term TREND line sits above the immediate term TRADE line.  The VIX is much more a concurrent indicator than a leading one. We would be long volatility here on weakness.

 

The global MACRO calendar provided some momentum to the RECOVERY trade in the wake of better-than-expected December trade data out of China, although the MATERIALS (XLB) was the worst performing sector yesterday.

 

China reported that exports jumped 17.7% year-over-year in December, above the 5% growth expected by the market and the first positive reading since November of 2008. Machinery products, textiles and furniture were the groups that saw the biggest increase in exports in December.  In addition, imports surged 55.6% year-over-year last month, up from the 26.7% increase in November.

 

Overnight China’s central bank sold one-year bills at a higher yield for the second time in a week, increasing the chance that higher interest rates in the first half of the year are a near certainty.  

 

The industrial (XLI) was the best performing sector yesterday.  The Transports was a key driver after rallying more than 2% last Friday.  Specifically, UPS rose 4.4% as JPMorgan added the stock to its focus list following the company's upside surprise last week. Additionally, Machinery stocks were also strong driven by the better-than-expected trade data out of China, which put some momentum behind the global recovery theme.

 

The Technology (XLK) cannot seem to find a bid.  The software stocks continue to be one of the worst performers within the XLK.  Additionally, hardware names were also sluggish with RIMM, IBM and AAPL among the laggards.  The semis were also weaker today with the SOX down 0.2%. 

 

The record drop in consumer credit continues to put focus on consumer deleveraging concerns as the Consumer Discretionary (XLY) was one of the worst performing sectors yesterday.

 

The range for the S&P 500 is 19 points or 0.6% (1,153) upside and 1.0% (1,134) downside.  At the time of writing the major market futures are trading lower.    

 

Yesterday the CRB declined 1.3% on the back of a big decline in orange juice, corn and wheat.  Aluminum, Sugar and Gold were the best performing commodities in the CRB yesterday. 

 

In early trading today Copper is trading lower on the stronger dollar.    The Research Edge Quant models have the following levels for COPPER – buy Trade (3.38) and Sell Trade (3.50).

 

In early trading today Gold Is little changed as it continues to trade near a one month high.    The Research Edge Quant models have the following levels for GOLD – buy Trade (1,126) and Sell Trade (1,160).

 

In early trading Crude oil is trading down for the second day in a row.   The Research Edge Quant models have the following levels for OIL – buy Trade (81.32) and Sell Trade (84.52).

 

Howard Penney

Managing Director

 

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