US STRATEGTY - EARNINGS TRUMPS CHINA

After its largest one-day pullbacks since February 4th, the S&P 500 rallied yesterday (up 0.65%), while the NASDAQ and the Russell 2000 were basically flat on the day.  The continued upbeat takeaways from Q1 earnings season are helping to underpin market sentiment.   According to the latest Investors Intelligence reading (April 27), 54.0% of advisors are bulls (up from 34.1% in February) and 18.0% are bearish (down from 27.8% in February).

The RISK AVERSION trade was on the back burner with the VIX down 7% after a 31.7% moon shot on Wednesday.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (19.46) and sell TRADE (22.53).

The biggest MACRO driver continues to be the European sovereign credit concerns and what the total EU/IMF support package for Greece will look like. Treasuries gave back some of yesterday's flight-to-quality rally, while the dollar index was up 0.29% (up for the past three days).  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (81.21) and sell TRADE (82.34). 

The market also benefited from the some good news on the liquidity front as the FOMC maintained its outlook for an extended period of low interest rates.  The Fed left the federal funds rate at 0-0.25% and noted that it continues to expect that economic conditions and stable inflation expectations are likely to warrant exceptionally low levels of the funds rate for an extended period.  In addition, the FOMC sentiment offered a slightly more upbeat assessment of the economic recovery. 

The two best performing sectors were leveraged to the RECOVERY/REFLATION trade - the XLF and the XLB.  Despite the uncertainty surrounding the financial regulation, the XLF was up 1.4%, although it has been the worst performing sector over the past week.  The upside leadership was driven by the BKX up 1.4%. Goldman Sachs finished higher for a second straight day, up 2.6%. 

The Materials (XLB) was underpinned by 1Q10 earnings season, with Dow Chemical up 5.9% following its EPS beat on rebounding demand in the US and Europe.  The steel group was another bright spot with the S&P Steel Index closing up 1.2%.  Metals and mining names stocks were among the best performers, as Gold was up 0.9% yesterday.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,149) and Sell TRADE (1,172).

Copper traded slightly higher yesterday, but continues to trade near a one-month low on recovery concerns in China.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.36) and Sell TRADE (3.52).

The outperformance in the REFLATION trade is coming despite the Chinese market (Hang Seng) breaking the Hedgeye Risk Management intermediate term TREND line of 21,129 and declining 8 of the last 9 days.     

Yesterday, the worst performing sector was the Consumer Discretionary (XLY) sector.  The restaurant group, which has seen a big run-up year-to-date, weighed on the sector following disappointing earnings results from BWLD.  BWLD traded down 17.1% on the day.  Weakness in PNRA and PFCB also contributed to weakness in the sector.  After falling more than 3% on Tuesday, retail remained fairly sluggish today with the S&P Retail Index down 0.6% yesterday.  Homebuilders were among the better performing names with the S&P homebuilding index up 1.8% on the day. 

In early trading, equity futures are trading above fair value in the wake of yesterday's FOMC meeting where the Fed maintained the fed funds target rate.  In addition to another round earnings, Initial Jobless claims will be a key data point today.  As we look at today’s set up the range for the S&P 500 is 21 points or 1.0% (1,180) downside and 0.8% (1,201) upside. 

Today’s MACRO events: 

  • March Chicago Fed Nat Activity Index
  • Initial Jobless Claims
  • Natural Gas Inventories  

Howard Penney

Managing Director

US STRATEGTY - EARNINGS TRUMPS CHINA   - S P

 

US STRATEGTY - EARNINGS TRUMPS CHINA   - DOLLAR

 

US STRATEGTY - EARNINGS TRUMPS CHINA   - VIX

 

US STRATEGTY - EARNINGS TRUMPS CHINA   - OIL

 

US STRATEGTY - EARNINGS TRUMPS CHINA   - GOLD

 

US STRATEGTY - EARNINGS TRUMPS CHINA   - COPPER