US STRATEGY - QUIET and to the UPSIDE

Yesterday was a very strong day for the S&P 500.  The breadth of the market was very positive as every sector was up, as the S&P 500 rose 1.02% of the day.  On the bearish side volume easy down 22% day-over-day from a very snowy Friday in February. 

On the MARO front there were some positive catalysts (1) reports of a new rescue package for Greece benefited the RISK trade, (2) strategic M&A activity continued (3) a strong earnings season and (4) better-than-expected January spending data.  All of this was good for the dollar index, which was up 0.37% on the day.  Today’s set up of the Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.26) and sell Trade (80.97).

On the negative side a below-consensus 56.5 reading on the February ISM, along with declines in the forward-looking new orders and production components, seemed to be set aside by an improvement in the employment component to 56.1 from 53.3.

In return for support from other member nations, Greece is expected to announce on Wednesday that it has agreed to implement new austerity measures. The news helped underpin global equities and a number of pockets of the risk trade.  The unwinding of the RISK trade can be seen in the VIX, which is broken on all three durations – TRADE, TREND, and TAIL.  The VIX declining 1.23% yesterday and today’s setup of the Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (18.79) and sell Trade (22.01). 

All year long strategic M&A has continued to offer a tailwind for stocks.  Yesterday, MIL agreed to be acquired by MRK for roughly $6B in cash, while AIG +4.1% rallied after announcing the sale of its Asian life insurance business to PRU $35.5B. In addition, MXB (4.6%) said that it had agreed to acquire RISK in a deal valued at $1.5B.

Yesterday, the best performing sector was Consumer Discretionary.  Continuing it three week outperformance on the back of better-than-expected Q4 earnings and 2010 outlook, retail was the biggest contributor to the outperformance; the S&P Retail Index was up  1.6% on the day.  The positive trend in consumer spending got off to a strong start in 2010, rising 0.5% in January, with real spending up 0.3% and running at a 3.3% annualized rate thus far in 2010.

We are currently bullish on Technology and long the XLK.  Yesterday, the Semis lead tech higher with the SOX +3.1%. The bulk of the move was attributed to SNDK which was up 11.9%, which boosted its Q1 guidance at last Friday's analyst day, while also noting that it expects F10 revenue to come in at the upper end of its forecasted range.  An additional tailwind for the semis came from January global semiconductor sales data from the SIA, along with upwardly revised fiscal Q2 guidance from SWKS.

We are also long the Financials (XLF), but they lagged the broader index yesterday.  After outperforming in a down week last week, the banking group was weaker on the day with the BKX (0.4%).   There was not a lot of news flow yesterday to point to the decline.  

As we wake up today, Equity futures are trading above fair value and at session highs on anticipation the EU will agree to an aid package for Greece.   It’s a quiet day for economic data points today; we will get API Crude Inventories, ABC Consumer Confidence, and February domestic Vehicle Sales will be reported throughout the day.  As we look at today’s set up, the range for the S&P 500 is 19 points or 1% (1,103) downside and 1.0% (1,122) upside. 

Copper fell from the highest in more than five weeks in London as mines reopened in Chile after a magnitude-8.8 earthquake halted operations and the dollar rallied.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.18) and Sell Trade (3.39).

In early trading gold is unchanged.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,096) and Sell Trade (1,124).

In early trading OIL is trading above $79.00.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.12) and Sell Trade (80.91).

Howard Penney

Managing Director

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