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The S&P 500 finished lower on Friday after trending down throughout the session and closing on the lows of the day. Despite ending on a challenging note, all major indices were up for the month. On Friday, Gold, Volatility and Utilities (XLU) were up on the day; the XLU was the only sector up on the day.

Last week, large caps outperformed small caps as the Russell 2000 declined 3.41% on the week. On Friday, the VIX was up 19.6%, rounding off a +32% move on the week; the strongest move in volatility since the week of January 22nd. The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (19.44) and sell TRADE (23.39).

On the MACRO front, real GDP increased 3.2% annualized in the first quarter; slightly below consensus of+3.3% and versus prior +5.6%. Personal consumption expenditures (PCE) were +3.6%; higher than consensus +3.3% and prior +1.6%. PCE accounted for 2.5% of the reported gain and business investment accounted for 1.6%, of which 1.5% was due to a continuing relative buildup in inventories. The big concern with the Q1 GDP report is the sustainability of trends in PCE.

Sustainable growth in PCE requires continued growth in disposable income. Without growth in income consumption can only be borrowed from the future quarters through additional debt and/or spending of savings. In the current environment, neither of those sources is real or sustainable. In 1Q, the quarter-to-quarter trend in real disposable income was contracting. (It should be noted that March income numbers are to be released today.) Real consumer credit, which has been reported only for January and February, was also contracting in the first-quarter versus the fourth-quarter.  In total, these trends show no basis for sustainable growth in PCE.

Also on Friday, April University of Michigan Confidence of 72.2 was better than consensus 71.0, but below March 73.6; preliminary reading was 69.5. Lastly, April Chicago PMI was 63.8; above consensus 60.0 and prior 58.8. Friday’s University of Michigan print is in line with the long term pattern of lower highs in consumer confidence that Keith discussed in our 03/26/10 note titled, “CONFIDENCE: IS IT REALLY A NEW SEASON IN AMERICA?” The storytelling that is so pervasive on Wall Street and in Washington is not being bought on Main Street.

On Friday GS was down 9.4% on a WSJ article concerning a possible federal criminal investigation; helping to make the Financials (XLF) the worst performing sector on the day and for the week. Other notable stocks MS and JPM declined 3.5% and 3.2%, respectively. Mortgage insurance companies also notably declined on the day.

With the Semi’s down (SOX -4.54%) on Friday, Technology (XLK) was also one of the biggest declining sectors on the day; last week the XLK lost 2.9%.

On the commodity front, crude remains in a BULLISH formation and was up 1.1% on Friday and 1.2% for the week (a three week high). The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.31) and Sell TRADE (86.31). In early trading, crude is slightly higher despite concerns that China’s third increase of bank reserve ratios will slow demand.

Last week, copper declined to a seven-week low on a decline in the China market and today’s news that the government ordered banks to increase its reserve ratios. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.29) and Sell TRADE (3.36).

Gold is in a bullish formation and is trading near a five-month high as the as the dollar is also higher on concerns the rescue package for Greece won’t be the last of the region’s debt crisis. The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,157) and Sell TRADE (1,182).

In early trading, equity futures are trading above fair value despite weak Asian and European markets and ahead of economic data. As we look at today’s set up, the range for the S&P 500 is 12 points or 0.6% (1,179) downside and 0.4% (1,191) upside.

Today’s MACRO events: 

  • March Personal Income
  • March Personal Spending
  • March PCE Core
  • April ISM Manufacturing
  • April ISM Prices Paid
  • March Construction Spending
  • Domestic Vehicle Sales

Howard Penney

Managing Director

 

US STRATEGY – CONSUMER SUSTAINABILITY IS THE KEY - S P

 

US STRATEGY – CONSUMER SUSTAINABILITY IS THE KEY - DOLLAR

 

US STRATEGY – CONSUMER SUSTAINABILITY IS THE KEY - VIX

 

US STRATEGY – CONSUMER SUSTAINABILITY IS THE KEY - OIL

 

US STRATEGY – CONSUMER SUSTAINABILITY IS THE KEY - GOLD

 

US STRATEGY – CONSUMER SUSTAINABILITY IS THE KEY - COPPER