US STRATEGY - INTERNAL DIVERGENCES

Yesterday, the S&P declined 0.17%. Though the uptrend remained intact, we saw a serious late-day reversal on Thursday. The waning upside momentum and negative internal divergences are catching up with the market; the Hedgeye models now have Energy (XLE) and Utilities (XLU) broken on TRADE AND TREND.  On the margin, the markets did have more support from the MACRO data flow.  Volume was up 13% day-over-day.

A better than expected jobless claims number provided more evidence for the RECOVERY trade.  Initial claims for the week ending March 20th were 442,000; lower than consensus 450,000 and down from the prior week’s revised number of 456,000. This is the lowest level in six weeks.  The 4-week moving average was 454,000; down from a revised prior week number of 465,000.

As our Financials analyst Josh Steiner noted yesterday “It is worth noting that the seasonal adjustment factors were updated this past week, as they are annually, which had the effect of lowering claims by 10,000 more than they would have been under the old methodology.  We think it's also worth noting that while the rolling average claims remain outside our 3-standard deviation channel, the one-week claims data is now tracking the high side of our channel suggesting further improvement ahead. We continue to expect to see a claims tailwind throughout the spring months (April, May) as census hiring picks up and weather-related effects dissipate.”

European Central Bank President Jean-Claude Trichet endorsed an aid plan for Greece, toning down his opposition to IMF involvement.  Disagreement over Greek aid, coupled with a downgrade for Portugal’s credit rating, has fueled concern that the European sovereign debt issues will undermine the RECOVERY trade.

Yesterday, the best performing sector was the Consumer Discretionary (XLY) and we shorted it.  At the highest prices we have seen in the US stock market since 2008, we are now shorting what's has been THE PAIN trade the entire way up: short the US consumer.  Helping the XLY was positive performance by the retailers (BBY and LULU) and a more positive outlook on employment driven by the jobless claims data.  AMZN and PCLN were the two best performing stocks in the XLY.

For the fourth day in a row, the Financials (XLF) outperformed although dropping well off their highs in the last hour.  Bernanke’s testified yesterday that his free money policy will continue as the “economy still requires accommodative monetary policies.”  The banking indexes (BKX) lead the way again driven by the larger money center banks; the regional’s underperformed the sector. 

The Dollar index had another strong day improving 0.34%, but is trading down slightly in early trading.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.69) and sell Trade (82.32).  The strong dollar is putting significant pressure on the REFLATION trade, as the CRB is broken on TRADE and TREND.   Materials (XLB) and Energy (XLE) were the two sectors that were down the most yesterday. 

While the VIX remains broken on all three durations - TRADE, TREND and TAIL - it has improved 12% over the last two days.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy Trade (15.98) and sell Trade (18.60). 

In early trading oil is trading higher for the first day in the last three as the dollar weakens.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.55) and Sell Trade (81.49). 

Gold prices are trading higher in early trading for the second day in a row.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,080) and Sell Trade (1,120).

In early trading, copper is trading higher on lower weekly Chinese stockpiles.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.35) and Sell Trade (3.42).

In early trading, equity futures are trading above fair value and near session highs in an attempt to reverse the sharp selloff into the close yesterday.  As we look at today’s set up the range for the S&P 500 is 25 points or 1.3% (1,151) downside and 0.9% (1,176) upside. 

Today's MACRO highlights are:

  • GDP (Q4 3rd read)
  • U. of Michigan - March final

Howard Penney

Managing Director

US STRATEGY - INTERNAL DIVERGENCES - S P

US STRATEGY - INTERNAL DIVERGENCES - USD

US STRATEGY - INTERNAL DIVERGENCES - VIX

US STRATEGY - INTERNAL DIVERGENCES - OIL

US STRATEGY - INTERNAL DIVERGENCES - GOLD

US STRATEGY - INTERNAL DIVERGENCES - COPPER