US STRATEGY - SAME AS IT EVER WAS

The market's post reactionary bounce to the GS news on Friday lacked conviction.  Clearly we are seeing much broader damage in the secondary stocks, with the S&P 500 up 0.45% and the NASDAQ and the Russell 2000 declining yesterday.  The trend toward RISK AVERSION and a number of other conflicting forces were at work to underpin the lack of overall direction in the market yesterday.

 

The earnings calendar and the M&A trends continue to be a net positive for the broader market.  So far in this earnings season, 26 of 28 S&P 500 companies have beat earnings so far in 1Q10.  On the MACRO front, headwinds continue to blow from both Greece and China, which is putting pressure on the RECOVERY trade and particularly the commodity-related equities. 

 

Volume declined 28% day-over-day and the VIX declined 5.5%.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (17.04) and sell TRADE (19.62). 

 

The Hedgeye Risk management models are still showing Utilities (XLU) is broken to both TRADE and TREND, while Healthcare (XLV) is broken on TRADE.

 

Yesterday only two sectors outperformed the S&P 500 - Financials (XLF) and Healthcare (XLV).   The XLF rallied 1.0% yesterday as the banking index (BKX) improved by +1%.  Citi was a strong performer after the bank reported strong 1Q results.  The trust names benefited from the more defensive tone in the market, along with a favorable mention in this weekend's Barron's.  Regional names were among the laggards with the KBW regional index up only 0.5%. 

 

The RISK AVERSION trade helped some of the more defensive sectors to outperform after losing out to the BETA shift trade last week.   Most notable was the Healthcare (XLV) and Consumer Staples (XLP).  Within the XLV, managed care provided a big boost for the healthcare sector, with the HMO +2.8% on the day. 

 

Additionally, a stronger dollar is putting some pressure on the REFLATION trade and the commodity-related sectors.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (79.65) and sell TRADE (81.71). 

 

While the materials (XLB) traded flat yesterday, it’s has fallen 1.3% over the past week.  Contributing the demise of the XLB, over the past two trading sessions the Chinese market has declined 5%, the biggest two-day drop in eight months.  The government continues to take additional steps to rein in speculative buying in real estate.  Steel stocks came under outsized pressure with the NYSE ARCA Steel Index declining 1.3% yesterday, after falling nearly 4.6% last week.

 

The CRB declined 1.0% yesterday as oil continues to decline.  OIL traded down 2.1% yesterday and 4.8% over the past two days.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (79.93) and Sell TRADE (83.46). 

 

In early trading, gold is trading at a two-week low, but lacking conviction on the downside.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,124) and Sell TRADE (1,150).

 

In early trading, copper rose from a three-week low in London on signs of stronger consumption trends in Japan.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.49) and Sell TRADE (3.64).

 

In early trading, equity futures are trading above fair value in a follow-through of yesterday's positive finish helped by earnings from Citi and news the SEC was split on whether to sue Goldman Sachs. 

 

Today, Fed Chairman Bernanke testifies at a House Financial Services Committee hearing on public policy issues raised by the bankruptcy examiner's report on Lehman Brothers.  Treasury Secretary Geithner and US SEC Commission chairman Schapiro also testify at the hearing.  As we look at today’s setup, the range for the S&P 500 is 37 points or 1.7% (1,177) downside and 1.4% (1,214) upside. 

 

On the MACRO calendar today:

  • API Crude Inventories
  • ABC Consumer Confidence

Howard Penney

Managing Director

 

US STRATEGY - SAME AS IT EVER WAS - S P

 

US STRATEGY - SAME AS IT EVER WAS - DOLLAR

 

US STRATEGY - SAME AS IT EVER WAS - VIX

 

US STRATEGY - SAME AS IT EVER WAS - OIL

 

US STRATEGY - SAME AS IT EVER WAS - GOLD

 

US STRATEGY - SAME AS IT EVER WAS - COPPER


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