While the market is down 11.7% from its high in April, over the last three days the S&P is up 0.25%, despite the weakness in global markets. Yesterday’s news flow was focused on stresses in the Spanish banking system and the escalating geopolitical tension surrounding the Korean peninsula. Supporting the performance has been a reduction in the RISK trade as the VIX declined 9.6% yesterday and is now down 26.5% over the past three days. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (26.89) and Sell Trade (45.83).
Our “Sovereign Debt Dichotomy” theme continues to play out, as the focus has begun to shift to the forced consolidation in the Spanish banking sector stemming from the Real Estate asset bubble. At the same time yesterday, we saw an increased level of stress in the funding markets with three-month dollar Libor rising for an 11th straight session to 53.6 bp, the highest level since early last July. This morning, three-month LIBOR has held steady day-over-day, unchanged at 53.6 bp. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.24). Despite the recent resilience in the euro, the issues in Europe continue to drag on sentiment.
In early trading, the DXY is trading higher for the third day in a row. The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.08) and Sell Trade (86.97).
From a MACRO perspective, the outperformance of the US recovery is taking a back seat to the MACRO headwinds from Europe. Yesterday, the Conference Board's consumer confidence index rose to 63.3 in May from 57.7 in April, the highest level since March 2008. The expectations index posted its third straight meaningful gain, increasing to 85.3 from 77.4 last month, and the highest level since August 2007. The Conference Board tends to be at best concurrent indicator; we use ABC weekly and Michigan bi-monthlies as pseudo concurrent-to-leading looks into consumer confidence. The Consumer Discretionary (XLY) was the second best performing sector yesterday.
The Materials (XLB) was the best performing sector yesterday, and one of four sectors that was positive on the day. The XLB outperformance came despite pressure on commodities and commodity equities from the strength in the dollar. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.01) and Sell Trade (3.31).
Precious metals were also up on the day; Gold closed up 0.2% to $1,197. At the time of writing, gold is trading at $1,213, down 2.4% from the record high of May 12th. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,255).
The Financials finished higher on the day after underperforming earlier in the day. While legislative issues remain, the outperformance was driven by the banking group with BKX up 1%. Regional names were among the best performers with KEY up 3.9%, STI up 3.6% and PNC up 2.1%. In addition, the investment banks and the mortgage insurers were another bright spot.
The Industrials (XLI) declined 0.1% yesterday on the continued scrutiny surrounding the RECOVERY trade. Conglomerates, E&Cs and machinery names were among the laggards. Another notable underperformer was Technology (XLK); the S&P Software index was down 0.7%, while the semis finished higher with SOX up 0.6%.
As we look at today’s set up, the range for the S&P 500 is 61 points or 2.5% (1,047) downside and 3.2% (1,108) upside. Equity futures are trading above fair value as global markets rebound from Tuesday's slump. The OECD has raised global economic forecasts and US GDP forecasts to +3.2% vs. previous +2.5%. For the fourth day, the Hedgeye Risk management models have 0/9 sectors on TRADE and 0/9 sectors positive on TREND.
On the economic front, to be reported today are:
- MBA Mortgage Applications
- US Durable Goods (Apr) consensus 1.5%; ex-transportation 0.5%
- New Home Sales (Apr) consensus 421K; MoM 2.3%
- DOE Crude Oil Inventories released
- Treasury Auctions in 5-yr notes
Oil is trading higher after the American Petroleum Institute said gasoline supplies fell 3.19 million barrels last week. Crude has dropped 20% since reaching $87.15 a barrel on May 3. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (67.33) and Sell Trade (71.72).