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The action in small-cap stocks (Russell 2000) is conveying a much more positive message that of the S&P 500.  The trends in the S&P 500 since last week’s low are not convincing and may be part of a larger consolidation phase. 

Last Friday, the S&P 500 shook off some late-morning sluggishness to finish higher on a 6% decline in volume.  The S&P 500 has closed higher eight of the last nine weeks.  The March quarter earnings season takeaways remained largely positive, with some support coming from the MACRO calendar.  The only real headwind came from Greece, but the sovereign contagion saga remained fairly limited for now.

New home sales exploded in March, beginning what we think will be a major buying push that will run through the next few months as the lagged data around the homebuyer tax credit comes trickling through. Remember, we're now just one week away from the expiration of the tax credit. The March data released this morning came in at 411k, up 26.9% (seasonally adjusted annualized rate) vs. consensus for 330k and last month's print of 308k (the lowest level in 12 months). In addition, months’ supply fell to 6.7 from 8.6 in February, the lowest level since late-2006.

Also on the MACRO front, ex-transportation durable goods orders rose 2.8% in March vs. consensus expectations for a 0.7% gain, while core capital goods orders jumped 4%, with continued strength in machinery. The shipments data was another bright spot as core capital goods shipments rose 2.2%.

Not surprisingly, the housing-leveraged names outperformed again yesterday.

The S&P 500 Homebuilding index was up 4.4% and 17.6% over the past week.

The only trades of note on Friday were:

COVERING CMG - Apparently the stock was overbought yesterday. Penney and I are simple men trying to earn simple and transparent spreads - covering red. KM

BUYING FXA - Buying into the risk management process that Glenn Stevens and the Reserve Bank of Australia continue to uphold. We are buying FXA on the down move today. KM

BUYING DJP - Both the DJP and CRB Commodities Indexes are starting to breakout above their respective intermediate term TREND lines. Our Q2 Theme of Inflation's V-Bottom syncs with what Mr. Macro Market is doing. KM

While the Dollar index closed down 0.26% on Friday, it closed up 0.65% on the week - the first up week in the last three.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.02) and sell TRADE (81.80). 

We have no position in the VIX currently and it remains broken on all three Hedgeye durations.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (14.86) and sell TRADE (16.81). 

On Friday, the Energy sector put in a strong performance today, rising 2.4% on the day.  The energy commodities were among the standouts in the CRB, with June crude up 1.7% to $85.12 a barrel.  The Coal and Oil services group were a big gainer yesterday, with S&P coal index up 4.6% and the OSX up 3.2%. Oil traded near $85 a barrel as the euro dropped for the seventh time in eight days on concern the European Union-led Greek bailout plan will be held up.   The Hedgeye Risk Management models have levels for the OIL at: buy TRADE (83.81) and sell TRADE (87.23). 

After underperforming throughout much of last week, the Healthcare sector (XLV) finished up 1% higher on the day. The strength was fueled by MRK +5%, which noted that healthcare reform will not impact its forecast for high single-digit earnings growth through 2013. Earlier in the week, one of the biggest drivers of the recent weakness in healthcare has been concerns about the larger-than-expected impact of healthcare reform.

Gold is declining from a one-week high in London as the dollar’s advance against the euro may curb demand.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,147) and Sell TRADE (1,164).

In early trading, Copper rose to a one-week high in London as investor sentiment improved after Greece moved toward securing a financial rescue package.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.52) and Sell TRADE (3.63).

In early trading, equity futures are trading above fair value as the market absorbs a resolution to Greece's funding crisis and refocus on fundamentals which continue to support the recovery story. Today's economic calendar is light, while earnings continue to be a focus.  As we look at today’s set up, the range for the S&P 500 is 15 points or 1.0% (1,205) downside and 0.2% (1,220) upside. 

Howard Penney

Managing Director