US STRATEGY – DC Fallout

US equities were weaker for a third straight day on Friday.  Last week’s three-day, 5.1% losing streak was the first for the S&P since November 20th, while the index posted its biggest weekly decline since the week-ended October 30th.

 

Stocks were rocked by the heightened regulatory scrutiny on the financial sector out of Washington and concerns about tightening moves in China.  The latter was putting significant pressure on the RECOVERY trade.   Lastly, the uncertainty surrounding Bernanke's confirmation added to the negative sentiment. 

 

The VIX was up 52.48% last week, the biggest weekly spike since October 2008 and finished at its highest level since November 4th. The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.51) and Sell Trade (29.59).

 

The Technology (XLK) was the worst performing sector on Friday.  The semiconductors sold off sharply with the SOX down 5.3% on the day.  AMD traded down 12.4% and was the worst performer in the group despite its better-than-expected Q4 results and relatively upbeat commentary about demand.  On Friday, GOOG declined 5.7% despite earnings and revenues that came in ahead of expectations. 

 

The Financials (XLF) was the second worst performing sector on Friday declining 3.3%.  The weakness was attributed to concerns surrounding the Obama administration's increased regulatory reforms.  On Friday, regulators shut down banks in Florida, Missouri, New Mexico, Oregon and Washington.  So far in 2010 nine banks have failed, following 140 closures in 2009.

 

While the Materials (XLB) outperformed on a relative basis on Friday it was the worst performing sector last week declining 6.4%.  The sector is underperforming as China is embarking on a tightening process.

 

As we look at today’s set up, the range for the S&P 500 is 46 points or 1.0% (1,080) downside and 3.2% (1,126) upside.  At the time of writing the major market futures are trading higher on the day.  

 

Last week copper prices fell for the second straight week, as concerns about demand from China as the tightening process continues to be played out.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.31) and Sell Trade (3.46).

 

In early trading today Gold is trading higher after declining 3.3% last week.  Like copper, gold has traded down for the past two weeks.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,085) and Sell Trade (1,116).

 

In early trading, crude oil is trading flat after declining 2.0% on Friday.  Crude has also declined for the past two weeks, on the back of a slowing China and increased supplies.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (74.11) and Sell Trade (76.77).

 

Howard Penney

Managing Director

 

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