US STRATEGY – MORE RISK AVERSION

The S&P 500 closed lower yesterday, finishing with a very ugly final hour of trading.  We also saw a contraction in volume.  On the MACRO front, there were no meaningful new directional drivers for stocks today, as the RISK AVERSION trade is still prevalent. 

 

On the MACRO calendar, there's not much to get excited about in yesterday’s jobless claims number. Initial unemployment claims came in at 444,000, unchanged from last week, although after upwardly revising last week's print by 4,000, this week's print is being cited as a 4,000 improvement sequentially. On a 4-week rolling basis, the improvement was meaningful, falling 9,000 to 450,500.  As we pointed out last week, we remain concerned that without significant improvement in claims, a leading indicator, there will be no meaningful improvement in unemployment, a lagging indicator.

 

At the time of writing, equity futures are trading lower in continuation of yesterday’s weakness, which came in the last two hours of trading.  Yesterday’s weakness was lead by Consumer Discretionary (XLY), Financials (XLF) and Industrials (XLI).  Also, every developed market is down except Denmark which is up 2.6%.  As we look at today’s set up, the range for the S&P 500 is 41 points or 1.2% (1,144) downside and 2.4% (1,185) upside.  On the MACRO calendar we have:

  • April Retail Sales
  • April Industrial Production
  • Capacity Utilization
  • May preliminary U. of Michigan Confidence
  • Mar Business Inventories

It’s important to note that the TED spread has rebounded over the past few days despite the bailout in Europe.  Yesterday, the VIX rallied 4.5% to 26.68.  The Hedgeye Risk Management models have the following levels for the VIX – buy Trade (21.01) and sell Trade (39.31).

 

The Dollar bullish TREND remains (up 0.45% yesterday) and it is trading higher again today.  The Hedgeye Risk Management models have the following levels for the DXY – buy Trade (84.24) and sell Trade (85.68).  The Euro down again and moving into the crash zone (-17.4% vs. Nov 09).  The Hedgeye target of $1.21 remains in place.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.23) and Sell Trade (1.27). 

 

Next to Consumer Discretionary, the Financials (XLF) was one of the worst performing sectors yesterday.  Increased litigation risk was the biggest headwind for the financials yesterday.   The WSJ reported that many more firms are in early-stage criminal scrutiny regarding representations they had made to investors in marketing CDOs.  In addition, the NY Times noted that NY Attorney General Cuomo has begun an investigation of eight banks to determine whether they provided misleading information to ratings agencies in an effort to inflate the ratings of certain mortgage securities.

 

On the Consumer Discretionary (XLY) side, retail sold off sharply with the S&P Retail Index down 3%.  URBN and KSS were among the notable decliners following April quarter results.   In the Restaurant space sluggish trends at WEN and JACK brought the group down.  The Homebuilders came under with the XHB down 3.6%.   

 

Despite the weakness in China, the materials (XLB) sector was a relative outperformer.  Aluminum names such as CENX +5.1% and AA +2.7% were among the standouts in the sector.  Bucking the trend steel stocks finished lower on the day, with some concerns surrounding a pullback in global steel prices.

 

Bloomberg is reporting that copper stockpiles monitored by the Shanghai Futures Exchange fell for a second week, extending a decline from the highest level since at least 2003.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.10) and Sell Trade (3.34). 

 

Crude oil fell to its lowest price in more than three months on speculation that Europe’s sovereign-debt crisis and rising supplies in the U.S. indicate that the demand recovery theme is losing momentum.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.38) and Sell Trade (74.99). 

 

Gold is in a bullish formation and is looking to extend its rally to another record as the “safe haven” is gaining momentum amid turmoil in European debt markets.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,205) and Sell Trade (1,254).

 

Howard Penney

Managing Director

 

US STRATEGY – MORE RISK AVERSION - S P

 

US STRATEGY – MORE RISK AVERSION - DOLLAR

 

US STRATEGY – MORE RISK AVERSION - VIX

 

US STRATEGY – MORE RISK AVERSION - OIL

 

US STRATEGY – MORE RISK AVERSION - GOLD

 

US STRATEGY – MORE RISK AVERSION - COPPER


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