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Hegel was right when he said that we learn from history that man can never learn anything from history.

~George Bernard Shaw

Yesterday, we shorted the SPX as the market rallied back up to our immediate term resistance line.  That being said, in the absence of remarkably negative news, the market continues to show resiliency.  The S&P 500 finished higher for a second straight session on Thursday (up 1.94% last two days).   The interconnected MACRO environment remained the primary driver for sentiment and stocks. 

For the time being, European Sovereign Debt concerns continued to dissipate on heightened expectations that the EU/IMF aid package for Greece will be the panacea the country needs.  At Hedgeye Risk Management, a historical perspective is an important component of how we view the market.  As such, we have a different view of how the Domino Effect of Sovereign Debt will continue to play out. It will not end as well as some may hope.

The waning RISK AVERSION trade helped put the focus back on the earnings season, where the news cannot get much better.  Yesterday, the VIX was down 12.5% and is now only up 12% on the week.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (17.27) and sell TRADE (19.42).

This past week initial jobless claims fell 11,000 to 448,000 from 459,000 (revised up 3k), which brought the rolling four-week average higher by 1,500 to 462,000. Our Financials analyst, Josh Steiner wrote yesterday - “As we said last week, there has emerged a clear divergence between the claims trajectory that dominated 2009 and the trajectory that has been in place year-to-date.  We remain concerned that without improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 50-75k above that level - exactly where we've been for five months now.”

Despite some emerging concerns, the Financials (XLF) was the best performing sector yesterday.  The banking group was a big gainer with the BKX +2.4%, as the investment banks also performed well with GS up 2.1%.  It was rumored that GS may pursue a settlement with the SEC. The asset managers continued to outperform, while Insurance stocks put in a mixed performance. 

Treasuries were stronger yesterday despite the move in stocks as the dollar index declined 0.46%.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (81.56) and sell TRADE (82.51). 

After underperforming earlier in the week, the Consumer Discretionary (XLY) outperformed yesterday, rising 2.2%.  The earnings season provided the catalyst for the positive sentiment.  HOT was a big winner in lodging and extended its recent run-up after posting much stronger-than-expected Q1 results.  The Homebuilders, Retail and Restaurants also contributed to the outperformance. 

Dragged down by earnings and a weak Chinese market, the REFLATION trade underperformed yesterday.  XON helped drag down the Energy (XLE), despite crude rising 2.3% on the day.  Natural Gas declined 8.5% following a larger-than-expected inventory build and was a headwind for some of the E&P and coal stocks. The oil services group also came under some pressure with the OSX (1%).  Crude remains in a BULLISH formation and the Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.11) and Sell TRADE (85.79).

The Materials (XLB) also underperformed as both copper and gold declined yesterday.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,153) and Sell TRADE (1,176).

Copper traded down another 1% yesterday and is now broken on TRADE and TREND.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.36) and Sell TRADE (3.52).

In early trading, equity futures are trading above fair value as markets are more focused on the corporate earnings picture.  As we look at today’s set up the range for the S&P 500 is 27 points or 1.4% (1,180) downside and 0.8% (1,217) upside. 

Today’s MACRO events: 

  • Q1 Advanced GDP
  • Personal Consumption
  • Core PCE
  • Employment Cost Index
  • Apr Chicago PMI 
  • Apr Final U. of Michigan Confidence 
  • Apr NAPM Milwaukee

Howard Penney

Managing Director