US STRATEGY - NOT GOING AWAY

The news flow on the MACRO front is quiet this week and so is the market.  The S&P 500 finished lower by 0.89% on very light volume.  The sovereign debt concerns are not going away as the issue continues to put pressure on the RISK trade.  The VIX closed up another 1.5% yesterday (22% Year-to-date) and is bullish on TRADE and TREND.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (23.98) and Sell Trade (27.66). 

 

Contagion fears are taking a toll on the Financials (XLF), which was the worst performing sector yesterday closing down 2.0%.  Yesterday our Financials analyst, Josh Steiner pointed out that Banking News reported that Deutsche Bank and Unicredit Group have denied requests from 3 to 4 Greek banks for loans on the repo market.    First it was the CDS market signaling trouble and now the repo market is breaking down.   

 

According to Bloomberg news, ECB Chairman Jean-Claude Trichet has decided to leave a symposium of policy makers in Sydney a day earlier than planned to attend a special EU summit on Thursday to discuss the growing debt problems among EU states. Trouble is brewing!

 

The Financials are also being hit with the Democrats talking regulatory reform with or without Republican cooperation.   The large-cap banks like WFC, BAC, C and JPM were among the notable underperformers.  In contrast, the bulk of the regional banks outperformed, while credit-card names were also under pressure. 

 

While the Materials (XLB) was the second worst performing sector yesterday, not all pockets of the RISK/RECOVERY trade underperformed.  Technology and Consumer Discretionary outperformed the S&P 500 yesterday.   

 

The Technology (XLK) sector outperformed the S&P 500 by 50bps yesterday.  The destruction in the SOX was halted for a day with the index down in line with the market.  Outside of the semis, there were a couple of bright spots in the communications equipment and PC related names.  Yesterday, we shorted AAPL.  We've spent the last week working on an Apple model and we think the Street's assumptions on margins in the upcoming two quarters are too hopeful. Hope is not an investment process. 

 

Yesterday, both the Consumer Staples (XLP) and Consumer Discretionary (XLY) sectors outperformed the S&P 500.  We are now short the Consumer Staples (XLP).   The XLP has finally broken both our TRADE and TREND lines. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.

 

Along with the rally in the homebuilders, the XLY benefited from an earnings beat from HAS +12.7% and better relative performance from the retail group.  The S&P Retail Index declined 0.15%, only declining late in the day.  Within the XLP, CVS and TSN were higher following earnings. 

 

The Dollar index took a breather yesterday declining 0.17%; the Hedgeye Risk Management models have levels for DXY at – buy Trade (79.48) and sell Trade (80.64). 

 

As we look at today’s set up the range for the S&P 500 is 36 points or 1.0% (1,045) downside and 2.4% (1,081) upside.  Equity futures are currently trading above fair value after the markets broke down late in the day yesterday. 

 

Copper rose for a second day in London on speculation that demand may swell on increased imports into China. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.79) and Sell Trade (3.01).

 

In early trading gold is trading higher on the back of a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,048) and Sell Trade (1,086).

 

Crude oil is trading near $72 in New York before the government data due tomorrow that may show U.S. inventories of diesel and heating oil declined last week. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.01) and Sell Trade (73.90).

 

Howard Penney

Managing Director

 

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