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US STRATEGY – DOUSING THE FLAMES

Yesterday, the rebound in the EURO seemed to be the big driver of the shift in sentiment, as the S&P rose 3.3% to 1,103.   The REFLATION trade benefitted from a strong rebound in the Chinese market and surging commodity prices.  The Hedgeye Risk management models now have Consumer Discretionary (XLY) as the only sector positive on TREND.  

Financials (XLF), Energy (XLE), and Materials (XLB) were the three best performing sectors yesterday.  There were a number of positive dynamics at work in the energy sector today, including the outperformance of the underlying commodities with July crude +4.2%.   Of note, BP rose 7% on reports that it had some success in stopping the flow of oil from a leaking well in the gulf.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.25) and Sell Trade (77.68).

Treasuries came under pressure today with the dampened risk aversion trade.  Moreover, the VIX declined 15.2% yesterday. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (28.07) and Sell Trade (45.20). 

Yesterday, we covered our short in the Dollar as the Euro bounces right back to the top end of our immediate term range.  The Dollar Index is in the process of putting in an intermediate term top, but we need to manage risk around the daily volatility of the position.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.27) and Sell Trade (86.97). 

The big news yesterday was that volatility in the Eurozone will not have a significant impact on China’s strategy of diversifying its foreign-currency reserves.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.24).

Within the Financials (XLF), the banking group led the way with the BKX up 4%.  C +4.2%, BAC +4.6% and JPM +4.2% were all strong performers.  With the pickup in risk appetite the higher bets regional names such as RF +6.5% and KEY 6.4% were among the best performers.

The Technology sector mad a notable recovery following Wednesday’s dramatic underperformance.  The hardware group provided a good chunk of upside leadership, along with recovery in the software sector.  The semis also finished sharply higher today with the SOX +5.2%.

In early trading, copper is trading higher and headed for the first weekly gain in seven weeks.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.03) and Sell Trade (3.21).    

So far this week, gold has rallied 3% and is trading higher today.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,191) and Sell Trade (1,233).

As we look at today’s set up for the S&P 500, the range is 96 points or 5.2% (1,046) downside and 3.5% (1,142) upside.  Equity futures are trading mixed to fair value in the wake of Thursday's pop. 

On the economic front to be reported today will be:

  • Apr Personal Income and Spending
  • PCE Deflator
  • Core PCE
  • May Chicago PMI
  • May U. of Michigan Confidence
  • May NAPM Milwaukee

Howard Penney

 

US STRATEGY – DOUSING THE FLAMES - S P

 

US STRATEGY – DOUSING THE FLAMES - DOLLAR

 

US STRATEGY – DOUSING THE FLAMES - VIX

 

US STRATEGY – DOUSING THE FLAMES - OIL

 

US STRATEGY – DOUSING THE FLAMES - GOLD

 

US STRATEGY – DOUSING THE FLAMES - COPPER