STRATEGY - REFLATION DEFLATION

The S&P 500 finished lower by 0.6% yesterday, as the REFLATION trade gave back some of its recent outperformance; oil declined 1.1% on a larger-than-expected build in crude stockpiles.  On the MACRO front, Greek bonds fell and stocks tumbled on speculation that the bailout will unravel.  Despite the correction in the S&P 500 and in each of the sectors, the Hedgeye Risk Management models still have all nine sectors in a perfect formation - positive on TRADE and TREND. 

 

The EURO fell for a fourth straight session against the dollar; if today’s early gains hold, the dollar will be up for the past three days.   A stronger dollar and a 2.4% increase in the VIX provided some headwind for pockets of the RISK/RECOVERY trade. The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.09) and sell TRADE (17.63).  We are currently long the VXX.

 

The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.74) and sell TRADE (82.13).

 

A larger-than-expected decline in February consumer credit seemed to accelerate some of the selling pressure late in the day, as volume picked up 23% day-over-day.  Consumer credit declined $11.5B to $2.448T in February, the biggest decline in three months. A Bloomberg survey was looking for a much smaller decline of $1B. Revolving debt fell by $9.4B in February, while non-revolving debt was down $2.1B. However, January consumer credit, which posted the first increase in a year, was revised to reflect a jump of $10.6B vs. the originally reported $5B increase.

 

Despite a larger-than-expected decline in consumer credit, the Consumer Discretionary (XLY) was the best performing sector on the day.  The XLY declined only 0.36% on the day.  The retail group continues to extend its outperformance with upbeat expectations heading into March comps due out today.  The earnings calendar was also a net positive.  Restaurant stocks also outperformed following the rest of retail and the consumer discretionary names.  CKR +6.6% was the best performer after announcing that it had received a takeover proposal that may be superior to the bid it accepted from Thomas H. Lee Partners in February.

 

The Energy XLE was the worst performing sector yesterday.  The weakness was largely attributed to a selloff in oil, a stronger dollar and some bearish inventory data. Crude stockpiles rose 1.98M barrels last week vs. the Bloomberg consensus for a 1.35M barrel increase. The refiner’s coal names were among the notable laggards in the energy sector. 

 

The Financials (XLF) finished lower for the first time in four days, declining only 0.4%.  With C and BAC up on the day, the money-center banks outperformed the regional’s.  The investment banks were notable outperformers with GS and MS up 2% and 2.3%, respectively. 

 

In early trading, crude oil is looking lower for a second day n New York after a report showed U.S. crude inventories increased more than forecast last week.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.14) and Sell TRADE (88.47). 

 

In early trading gold is looking to decline on the back of a stronger dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1117) and Sell TRADE (1153).

 

In early trading, copper fell in London for a second day, extending a decline from a 20-month high, on concern that recent advances were not supported by demand from China.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.56) and Sell TRADE (3.69).

 

In early trading, equity futures are trading below fair value as global markets slip in the face of Greece's growing financial instability.  As we look at today’s set up the range for the S&P 500 is 16 points or 0.5% (1,176) downside and 0.8% (1,192) upside. 

 

Today's MACRO highlights are:

  • Initial Jobless Claims
  • Natural Gas Inventories
  • Treasury Auctions in 30-yr bonds

 

Howard Penney

Managing Director

 

STRATEGY - REFLATION DEFLATION - S P

 

STRATEGY - REFLATION DEFLATION - DOLLAR

 

STRATEGY - REFLATION DEFLATION - VIX

 

STRATEGY - REFLATION DEFLATION - OIL

 

STRATEGY - REFLATION DEFLATION - GOLD

 

STRATEGY - REFLATION DEFLATION - COPPER