US STRATEGY - WEEK’S GAINS LACK CONVICTION

Last week stocks finished higher with the Dow, S&P 500, NASDAQ and Russell 2000 up 2.31%, 2.23%, 3.58%, and 6.28%, respectively.  Despite having snapped a two-week losing week, there was no conviction behind the move.  The issues surrounding the Trillion dollar EU/IMF support package drove the bulk of the direction for stocks last week. 

 

At the end of the week, there were no sectors that are positive on TRADE and only three that are positive on TREND (Industrials (XLI), Consumer Discretionary (XLY) and Utilities (XLU)).   Last week, the Industrial sector was the best performing, rising 3.9%.  The XLI was the beneficiary of the EU/IMF bailout as it provides some support for the RISK/RECOVERY trade.  Last week, the S&P Industrial Conglomerates Index and the S&P Machinery Index were up 4.2% and 5.1%, respectively. 

 

China remained a MACRO headwind for US equities as the Shanghai Composite officially crashed last night, falling 5.07%, and is now down 21.9% year-to-date.  

 

On Friday Financials were the worst performing sector, on the regulatory overhang from Washington and the widening criminal probe of the investment banks are weighing on sentiment.  Late last week, there was the unexpected passage of the interchange amendment on Thursday night.  The financial regulations led to a steep drop in credit cards stocks on Friday with V down 9.9%, MA down 8.5% and CATM down 9.8%. 

 

Last week, Energy stocks underperformed as crude drops below $72.  Crude has now declined 17.5% over the past two weeks.  Within the XLE on Friday, E&Ps, oil services and integrated were all under pressure.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.27) and Sell Trade (75.26). 

 

At this time of writing the Euro is within a penny of our Q2 downside target of $1.21; getting immediate term oversold finally and USD is now overbought.  While the dollar is trading up again this morning, the Euro is trading down against all major currencies with the exception of British Pounds and Australian dollars.  With growth concerns mounting, the Australian dollar is under pressure and Australian bond yields were up today.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.67) and Sell Trade (86.23).

 

Sovereign credit contagion and stability concerns have driven a good chunk of the recent weakness in the Euro, while the outperformance of the headline US economic figures have contributed to driving the dollar higher.  Euro concerns continue to permeate the credit markets; 3 Month LIBOR is up to 0.45 and the TED Spread has widened further, indicating that the perception of credit risk continues to heighten.  The inverse correlation between the TED spread and the Euro has grown tighter; it is now -0.94.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.26).

 

Gold hit an all-time high last week (up 1.2%), while precious metals stocks (XAU +6.9%) also held up fairly well despite the inability of the EU/IMF backstop to put a bid under the euro.  The resilience in gold and gold equities seemed to be a function of heightened concerns surrounding the “fiat fools’” currency debasement following the massive bailout package and the accompanying ECB balance sheet deterioration.  Gold is now trading at $1,230 per ounce.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,211) and Sell Trade (1,259).

 

At the time of writing, equity futures are trading above fair value, but looking unchanged.  Global world volatility is driving MACRO sentiment and today's tone is likely to be driven by ongoing news out of the Eurozone region and the crash in the Asian markets.  As we look at today’s set up, the range for the S&P 500 is 34 points or 4.1% (1,110) downside and 1.2% (1,144) upside.  On the MACRO calendar we have:

  • May Empire Manufacturing
  • March Net Long-term TIC Flow
  • May NAHB Housing Market Index

Copper traded down 3% on Friday and in early trading it’s down nearly another 2% today.  Copper is trading lower on a stronger dollar and on concern that Europe’s sovereign-debt crisis and the decline in the Chinese market may curb demand for the commodity.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.99) and Sell Trade (3.18). 

 

Howard Penney

Managing Director

 

US STRATEGY - WEEK’S GAINS LACK CONVICTION - S P

 

US STRATEGY - WEEK’S GAINS LACK CONVICTION - DOLLAR

 

US STRATEGY - WEEK’S GAINS LACK CONVICTION - VIX

 

US STRATEGY - WEEK’S GAINS LACK CONVICTION - OIL

 

US STRATEGY - WEEK’S GAINS LACK CONVICTION - GOLD

 

US STRATEGY - WEEK’S GAINS LACK CONVICTION - COPPER

 


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