US STRATEGY - PROGRESS

Yesterday we sold our position in Healthcare; shorted the US Oil Fund and Carnival Corp (CCL).  Todd Jordan doesn't see what consensus sees coming for Carnival in 2010. We think demand will continue to languish as the supply and debt issues refuse to go away.

 

Yesterday, the move in the S&P 500 to the upside was impressive.  The S&P 500 closed up 1.3% on 13% day-over-day improvement in volume.  The two-day move in the S&P 500 is now 2.73%.  The SAFETY trade would be the overriding catalyst for the two-day move as Healthcare (XLV) and Consumer Staples (XLP) are the only two sectors back to positive on both TRADE and TREND. 

 

Yesterday we sold our position in Healthcare.  As Keith said yesterday, “As the Pelosi factor creeps into our craws, we are mindful of political risk. Healthcare is up +1.6% here, so Tom Tobin and I will get off the bus, for now.”

 

In addition, RISK AVERSION was fashionable for a second straight day with a positive data points from Greece (the European Commission's is expected to back a deficit reduction plan); the VIX declined 4.91%, to 21.48 and is now broken on TRADE and TREND.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (20.63) and Sell Trade (22.26).  With the earning season more than half over the trends from machinery, AG-products, personal care selected industrial groups are providing additional support to the market. 

 

On the MACRO front, an improvement in December pending home sales coupled with better-than-expected earnings out of DR Horton set a more constructive macro tone to the housing sector and the RECOVERY trade.  Pending home sales increased 1% month-to-month in December, in-line with expectations, but significantly better that the downwardly revised 16.4% plunge in November.   It should be noted that consensus expectations are for pending home sales to strengthen into the spring on the back of low prices and mortgage rates and the extension of the homebuyer tax credit.

 

The Industrials (XLI) was the second best performing sector yesterday and Hedgeye Risk Management models have the XLI moving back to positive on TREND.  A strong earnings number out of Emerson Electric (EMR) took the stock up 10.1% on the day.  In addition, the machinery group outperformed for the 2nd straight day with the S&P Machinery Index up 1.9%. It also should be noted that there were better-than-expected January auto sales from F and GM. 

 

The Financials (XLF) was the 3rd best performing sector yesterday, improving 1.7%.  The improvement can be attributed to the belief that banking regulation will get severely diluted if it is ever passed into law. Within the XLF, the money-center banks (JPM, C and BAC) outperformed the regional’s. 

 

Yesterday, Consumer Discretionary outperformed by 10bps and moved to positive on the TREND duration.  The retail group was a contributor to the outperformance; the S&P Retail Index rose 1.35%.  Department stores outperformed for a 2nd straight session day and Barnes & Noble was up 7.78% after Ron Burkle is looking to acquire a significant position in the company.  The lower-beta names like the discount and dollar-stores underperformed.

 

As we look at today’s set up the range for the S&P 500 is 45 points or 2.9% (1,071) downside and 1.1% (1,116) upside.  Equity futures are trading above fair value after yesterday’s strong performance.  Today performance will likely be driven by more earnings which continue to be better than expectations.  

 

The Dollar Index decline for the second day in a row and the Hedgeye Risk Management models have the following levels for DXY – buy Trade (77.94) and sell Trade (79.56). 

 

In early trading Copper is extending its gains for a 3rd day, as the rally in RECOVERY trade and a weaker dollar is helping the demand outlook.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.96) and Sell Trade (3.21).

 

In early trading Gold is up for the 4th straight day as the dollar has weakened.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,076) and Sell Trade (1,119).

 

Crude oil rose in New York for a 3rd day before data that is expected to show that U.S. supplies of distillate fuels shrank last week.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.21) and Sell Trade (78.31).  Yesterday, we shorted the US Oil Fund.  We have been waiting, patiently, to short the US Oil Fund on an up day.

 

We continue to be bullish on the Buck and bearish on China. These factors contribute to our multi-factor (bearish) intermediate term stance on the oil price.

 

Howard Penney

Managing Director

 

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