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For the past two days, the pattern of the move to the downside is clearly more aggressive than that of the recent push higher. On Wednesday, US stocks were weaker for the second straight day; the S&P declined 0.66%.European sovereign credit contagion concerns remained the big headwind for stocks today, as the RISK AVERSION trade is continues to press on. The VIX was up 4.4% yesterday and now up 14% for the week.

The Dollar index was up 0.94% yesterday and is up 2.69% this week.

On the MACRO front, the labor market is providing some positive economic momentum in the US and the focus will shift to the April payrolls data due out on Friday. Yesterday, ADP private employment was up 32,000 last month, slightly above the 30K consensus. In addition, February and March were revised up a cumulative 69,000. Services sector payrolls rose 50,000 in April following a 54,000 gain in March, while manufacturing payrolls were also a bright spot, up 29,000 on the back of a revised 19,000 increase in March.

Also on the MACRO calendar, ISM non-manufacturing was unchanged at 55.4 in April vs. a Bloomberg survey of 56.0. The bulk of the core components were also little changed on the month, but the takeaways from the report are still consistent with the recovery momentum theme. The pace of improvement is slowing, however.

While the labor market is providing some positive momentum to the RECOVERY trade, the China tightening concerns are rattling the Chinese market and providing a headwind to the RECOVERY trade. Last night, the Shanghai Composite Index finished down 4.1% and is now down 16.4% for the year-to-date.

The Hedgeye Risk Management Models have all nine S&P sectors broken on TRADE.

For the second day in a row, the low beta sectors (Healthcare (XLV), Utilities (XLU) and Consumer Staples (XLP) were the best performing sectors. Both the XLP and the XLU were up on the day.

Two of the three worst performing sectors were the Industrials (XLI) and Materials (XLB). Declining commodities and a strong dollar are providing a significant headwind for the group. A big laggard in the XLI was GE trading down 2.6% yesterday. Yesterday, crude dropped 3% and is now down 7.3% over the past three days.

Another notable laggard was Consumer Discretionary (XLY). Within the XLY, Media names were notable laggards on the back of disappointing fiscal Q4 guidance out of NWSA, and TWX missed on the top-line. Gaming, lodging and Restaurant stocks also came under pressure. Also, the bulk of the stocks leveraged to the housing sector underperformed again today with the S&P 500 Homebuilding index down 3.6%.

In early trading, equity futures are trading above fair value as European markets look to have stabilized, while Asia was much weaker. Today sees a further raft of corporate earnings with weekly jobless numbers. As we look at today’s setup, the range for the S&P 500 is 32 points or 0.5% (1,160) downside and 2.2% (1,192) upside.

Today’s MACRO events: 

  • MBA Mortgage Applications
  • April Challenger Job Cuts
  • April ADP Employment
  • April ISM Non-Manufacturing Composite 

Howard Penney

Managing Director