US STRATEGY – SETTLING INTO REALITY

Reality leaves a lot to the imagination. 

~John Lennon

In early trading, the U.S. stock-index futures are declining after the S&P 500 Index surged 4.4% the biggest move in more than a year.  The pressure in early trading is centered on the REALITY that the nearly $1 trillion emergency lending package does not fix the Eurozone's sovereign debt issues, as well as China being down 1.9% over night on signs of overheating. That brings China's year-to-date decline to -19.2%.  As we look at today’s setup, the range for the S&P 500 is 26 points or 1.4% (1,143) downside and 0.8% (1,169) upside. 

Inflation in China is also a REALITY.  China's consumer prices rose a greater-than-estimated 2.8% in April, the fastest pace in 18 months.  Chinese inflation accelerated from 2.4% March and the 2.7% median estimate on Bloomberg.  Chinese Producer prices jumped 6.8% from 5.9% in March and the 6.5% median estimate.  Importantly, China NDRC Housing prices rose by a record 12.8% in April from 11.5% in March.  The current government crackdown on slowing a white hot economy is having little impact as price pressures continue to build throughout the economy. 

The Hedgeye Risk management models have all nine sectors broken on TRADE and only three broken on TREND.  Two of the three sectors broken on TREND (XLE and XLB) are leveraged to the RECOVERY/REFLATION trade.  With the Chinese market also broken on TRADE and TREND, we would be looking to other sectors to outperform.  Currently, our 3% allocation to US equities is in the Q’s.       

Yesterday, short-covering was getting a bulk of the credit for the bounce, with parts of the RISK AVERSION trade was in place as the VIX down 29% on the day.  The Hedgeye Risk Management models have levels for the VIX at: buy Trade (25.90) and sell Trade (39.47).

Yesterday, the Dollar Index looked like it was going in for a rough ride, but ended up down only 0.35% on the day.  In early trading today, the DXY is trading up 0.5%.  The Hedgeye Risk Management models have levels for the DXY at: buy Trade (83.29) and sell Trade (85.52).

In Europe, today's REALITY is that the Euro is crashing right back down to the low end of our range from yesterday. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.25) and Sell Trade (1.29). 

Not surprisingly, the RISK/RECOVERY pockets of the market were some of the best performing sectors yesterday.  The Industrials (XLI), Financials (XLF) and Consumer Discretionary (XLY) were the three best performing sectors on the day.  Some of the notable subsectors that outperformed were, the S&P Machinery Index (up 6.9%), the S&P Steel Index (up 6.3%), Transports (up 5.5%) and S&P Homebuilder index (up 9.5%).

Within the XLF, the Banks lead the group higher; the BKX was up 6.2% on the day.  The mortgage insurers ran up sharply yesterday, while the Investment banks were some of the laggards (GS up 0.6% and MS up 4%). 

The SAFETY trade (Healthcare, Consumer Staples and Utilities) lagged the broader market after outperforming on the back of the defensive rotation seen last week. 

Yesterday, Copper and Natural Gas lead commodity prices higher.  Copper was up 2.6% yesterday, but is still broken on TREND and TRADE and in early trading, is following the Chinese market lower.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.06) and Sell Trade (3.34). 

OPEC raised estimates for global oil demand in 2010 on a more optimistic outlook for growth in China. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (75.06) and Sell Trade (80.36). 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,217).

Reality is the state of things as they actually exist, rather than as they may appear or may be thought to be.

Howard Penney

Managing Director

US STRATEGY – SETTLING INTO REALITY - S P

 

US STRATEGY – SETTLING INTO REALITY - DOLLAR

 

US STRATEGY – SETTLING INTO REALITY - VIX

 

US STRATEGY – SETTLING INTO REALITY - OIL

 

US STRATEGY – SETTLING INTO REALITY - GOLD

 

US STRATEGY – SETTLING INTO REALITY - COPPER