US STRATEGY – REGULATION FEARS SLOW UPWARD MOMENTUM

With yesterdays mixed performance, waning upside momentum remains the greatest concern.  The S&P 500 finished down 0.1% on a 6% uptick in volume, and breadth was very weak.  Yesterday’s headwinds centered around increased signs that there is momentum in Washington for a financial regulatory overhaul.  This was compounded by the disappointing guidance out of the healthcare sector as it relates to reform legislation. 

 

Some of the trades we did yesterday:

 

BUYING ICE  - We want some long exposure to the exchanges (transparency in OTC derivatives pricing) ahead of tomorrow's political circus that will be held in Washington.

BUYING XLV - Healthcare is getting crushed today.  Beyond $31.41 the XLV is 2.5 standard deviations oversold; buying red as the long term TAIL of support holds.

SHORTING GIL - Everyone knows GIL's quarter is going to be good, but everything has a price and this stock is immediate term overbought as cotton prices head higher.  KM

BUYING WFMI - We have no doubt that the higher-end income earners of this developing high-low society will continue to eat well. Immediate term TRADE line of support = 37.19.  KM

COVERING FXE - On this the Hedgeye Morning Call (830AM) we said we'd cover the Euro at 1.33, so I'll do that here. We remain bearish on the Euro with a new immediate term range of 1.33-1.35.  KM

 

Yesterday we also traded out of our VIX position. 

 

One of our key themes for 2Q is Sovereign Debt Dichotomy.  As we look at the macroeconomic environment ahead, what’s certain is that investor fears associated with sovereign debt default (globally) will persist.  In early trading, European markets are down after the European Union said Greece's budget deficit last year was worse that it previously forecast and could top 14% of GDP.     

 

The two best performing sectors yesterday were Industrials (XLI) and Consumer Discretionary (XLY).  Household Durables helped the XLY higher, lead by the Homebuilders (XHB +2.4%).  The home builders appeared to gain momentum as mortgage applications jumped just over 10% last week, while applications for refinancing surged nearly 16%.  At the same time, mortgage rates fell sharply for a second straight week.

 

Yesterday, Technology (XLK) took center stage with Q1 results from AAPL, which was up 6% on the day.  AAPL beat on both the top and bottom line, with help from better-than-expected iPhone and iPad demand.  On the other hand, YHOO declined 5.1% amid disappointment surrounding the performance in search.  The semis were also back on the defensive today, with the SOX down 1.1%.

 

With the Chinese market waning of late (down 1.1% last night), the Materials (XLB) is proving to be much more sensitive than the broader market to some of the recent macro headwinds.  FCX (3%) was a notable laggard despite posting strong operating results for Q1.   Steel stocks were mostly weak again yesterday.   Additionally, a stronger dollar is putting some pressure on the REFLATION trade and the commodity-related sectors. 

 

Yesterday, Healthcare (XLV) was the worst performing sector with Biotech BTK down 1.5% and the HMO index down 1.8%.  GILD sold off sharply after reducing its 2010 product sales guidance to reflect the impact of healthcare reform legislation.

 

In early trading, equity futures are trading at mixed-to-fair value as markets digest sovereign debt concerns among Europe's peripheral states with corporate earnings which continue to beat on EPS. As we look at today’s set up, the range for the S&P 500 is 37 points or 0.6% (1,199) downside and 0.6% (1,214) upside. 

 

Today’s MACRO calendar:

  • March PPI
  • Jobless claims
  • March RPX Composite
  • March Existing Home Sales
  • House Price Index

Howard Penney

Managing Director


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