US STRATEGY - THE S&P ROILING UNDERTONE

The S&P 500 finished down 0.21% yesterday, but well off their worst levels of the day.  Thursday’s decline is largely a function of global MACRO headwinds, as the earnings season is in the rear view.   

Yesterday in the USA, initial claims rose 22,000 to 496,000 for the week ended February 20th, significantly above the 460,000 consensus.  Consequently, the 4-week rolling claims number rose 6,000 to 473,800 from 467,800.  This latest print pushes claims squarely outside our 3 standard deviation channel. For reference, our channel reflects the trajectory that's been in place since the March 2009 peak in claims. While we had been hesitant to call a reversal in the underlying improvement trajectory, the fact is that six weeks of data do make for a trend.  See our post on Hedgeye.com from yesterday for more details. 

On a global MACRO front, sovereign credit concerns were exacerbated after Moody's, the only ratings agency that still has an A-level rating on Greece, said that it may lower its A2 rating within months.   With the Moody’s data point a lagging indicator, the VIX was down 0.84% yesterday and has declined 2.6% over the past week and 20.9% over the past month.  The VIX is currently broken on all three durations (TRADE TREND and TAIL) and today’s Hedgeye Risk Management models have levels for the VIX—buy Trade (19.03) and sell Trade (22.82).

Yesterday, durable goods orders jumped a better-than-expected 3% in January, though upside was largely a function of stronger aircraft bookings, as orders excluding transportation declined 0.6%.  The Industrials (XLI), which is one of four sectors that is positive on both TRADE and TREND, was one of the three worst performing sectors.  Rounding out the bottom three performing sectors were Technology (XLK) and Financials (XLF). 

Yesterday, Technology (XLK) was the worst performing sector on the day.   Semiconductors were under pressure for much of the day; the SOX down just 0.3% on the day.  Since the beginning of the earnings season the semis seem to get out from underneath concerns about inventories and order cancellations. Additionally, the MOBILITY space took it on the chin with PALM down 19.3% after guiding Q3 revenue below consensus and catching multiple downgrades.

The two best performing sectors were Consumer Discretionary (XLY) and Consumer Staples (XLP).  The S&P Retail index gained 0.37% yesterday, following a 1.96% move on Wednesday.  Within the XLP, soft-drink stocks were in focus today after KO announced that it would purchase the North American operations of CCE, which was up 32.9%.  DPS also was up on M&A speculation and after the company boosted the size of its buyback and better than expected earnings and guidance.

On the MACRO calendar today we will see the first revision to Q4 GDP, February Chicago PMI, February final U. of Michigan Confidence, February NAPM Milwaukee and January existing homes sales.  Equity futures are trading above fair value in a continuation of the late rally yesterday which saw a majority of the session's losses erased by the close. The Q4 GDP report will be the main highlight of a number of economic reports today.  As we look at today’s set up the range for the S&P 500 is 26 points or 1% (1,093) downside and 1.5% (1,119) upside. 

Copper rose in London, paring its first weekly drop in three weeks, as the dollar declined and stronger Japanese industrial production fueled speculation that demand will remain strong.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.18) and Sell Trade (3.40).

India, the world’s biggest consumer of gold, raised import duties on gold, silver and platinum to reflect higher global prices for the precious metals.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,097) and Sell Trade (1,124).

Crude oil is in position for the biggest monthly advance since October, amid speculation OPEC won’t increase output quotas and as the dollar is slightly weaker.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.10) and Sell Trade (81.95).

Howard Penney

Managing Director

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