Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.
- Benjamin Graham
The issues that surround one of our three key themes for 2Q10 (Sovereign Debt Dichotomy) are not going away despite a $1 trillion bail out of the PIIGS in the EU. Although our conclusion has been that it will bring May showers (another 2Q10 theme), the prevailing market structure is bullish and is begging us to speculate once again.
Yesterday, US equities finished higher, the move was muted with volume down 13% day-over-day and down sequentially for the past four days. The S&P 500 rose 1.37% yesterday, while the Russell 2000 rose 2.97%. Globally, equity markets continue to be focused on macro developments in the EU, particularly as additional austerity measures adopted by Spain helped to dampen some of the moral hazard concerns that had have dominated the market since the beginning of May. This too shall pass, as Spain’s underlying fundamentals suggest an even rockier road ahead (email if you’d like to take part in our Monthly Strategy Call on May 18th: Sovereign Debt: Bearish Enough on Spain?). While these austerity measures are needed, the monstrous amounts of debt being taken on by European governments continues to debase the Euro.
At the time of writing, equity futures are trading below fair value, giving back some of yesterday’s gains. In Europe, Greece, Spain, France and Italy (all problem deficit countries) all trading lower again this morning. Since the market close yesterday, CSCO reported numbers above estimates (but trading lower) and the SAP bid for Sybase (SY) is now official. As we look at today’s set up, the range for the S&P 500 is 42 points or 2.4% (1,144) downside and 1.2% (1,186) upside.
On the MACRO calendar we have:
- April Import Price Index,
- Initial jobless claims
- Treasury Auctions in 30-yr bonds
The reduced level of moral hazard concern can also be seen in the VIX, which was down 9% yesterday and has declined sequentially for the past three days. It should be noted that the VIX is still up 63% over the past month. The Hedgeye Risk Management models have levels for the VIX at: buy Trade (20.41) and sell Trade (39.39).
The Dollar bullish TREND remains (up 0.43% yesterday) and is trading higher today. The Hedgeye Risk Management models have levels for the DXY at: buy Trade (83.85) and sell Trade (84.99). In contrast, the Euros bearish TREND remains as the Hedgeye Risk Management model registers its lowest low of immediate term support YTD at 1.24. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.28).
The XLK was the best performing sector yesterday after selling off on Tuesday. M&A and the credit-card names were among the standouts in the sector. SY was up 35.1% on reports that the company will be acquired by SAP. IBM (up 4.6%) was one the best performers in the hardware space after the company said it expects to double its earnings to at least $20 a share by 2015. The SOX also rallied 2.8% yesterday.
The Industrials (XLI) and Materials (XLB) outperformed the broader market today. Both sectors have been significantly impacted the macro influences that have been driving the market over the last couple of weeks. The Machinery group and Transports were big gainers yesterday with the S&P Machinery Index +3% and the Transports up 2.1%.
The low beta Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) were the bottom three performing sectors yesterday.
In early trading, Copper rose for the first time in three days in London as concerns about European budget deficits eased as Spain announced its biggest round of budget cuts in 30 years. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.07) and Sell Trade (3.21).
Oil is looking lower for a third straight day as U.S. crude inventories grew and the dollar is stronger. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (74.99) and Sell Trade (80.34).
Gold’s safe-haven status continues with Gold up 1.8% yesterday and is now up 12.4% YTD. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,199) and Sell Trade (1,246).