US STRATEGY – Inching Up

The S&P 500 is looking to end the week with another move to the upside.  Yesterday, the S&P 500 finished quietly higher by 0.4% on very light volume.  The S&P is now up 1.8% over the past five trading days. 


On the global MACRO front the risk trade continues to abate on the back of the upbeat developments out of the Eurozone, as Greece's sale of 10-year notes was supposedly more than three-times oversubscribed (according to StreetAccount).  The VIX continues to confirm the RISK AVERSION trade.  The VIX declined 0.6% yesterday and continues to be broken on all three durations – TRADE, TREND and TAIL.


On a number of different MACRO factors, price trends point to a continued recovery, though even with the S&P less that 3% from its recent high, there still seemed to be a lack of conviction.  Other positive MACRO moves yesterday included better-than-expected February comps, dampened regulatory concerns in the financial sector and a downturn in initial claims.  The two best performing sectors yesterday were the Financials (XLF) and Consumer Discretionary (XLY). 


The retail momentum continues with the S&P Retail Index +1.3% yesterday.  The index was underpinned by better-than-expected February same-store sales data, despite the fact that consensus was already fairly upbeat going into the day. 


Parts of the REFLATION trade outperformed yesterday; the Materials (XLB) was the third best performing sector yesterday despite renewed tightening fears that led to a selloff in China and a very strong dollar.   


The market seemed to ignore another round of weaker-than-expected housing data, as pending home sales fell 7.6% month-to-month in January vs. expectations for a 1% increase.   The January decline, which followed a 0.8% increase in December and 13.7% plunge in November, was broad-based, as all four regions posted lower sales.  Seasonal issues and weather is a partial explanation for the weakness in the recent trends.  Expectations are now for sales to surge in existing-home sales in April, May and June.


Yesterday, the best performing sector was Financials (XLF).  The sector benefited from the waning effort to overhaul the financial system.  This dynamic seemed to be particularly supportive for investment banks and money-center names.  


As we wake up today, equity futures are trading above fair value in a continuation of Thursday's rally on the back of the strong retail sales numbers. Today's focus will be on the February employment data.  On the MACRO calendar today we have:


February Nonfarm Payrolls

January Consumer Credit


In early trading, copper is trading higher and headed for a third weekly gain in four weeks.  Gold is little changed in London and looking to advance advance as demand strengthens on concern about European sovereign debt.  Yesterday, crude fell for the first time in two days as the dollar strengthened.  Oil is trading slightly higher today. 


Howard Penney

Managing Director

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