The S&P finished higher by 2.6% and closed near its best level of the day.  The sectors with the most leverage to the RISK/RECOVERY trade outperformed. The MACRO calendar was a net positive with better-than-expected April housing data.  The enthusiasm is likely to be short lived with the expiration of the homebuyer tax credit.  The May auto sales number also came in ahead of expectations.


Treasuries were weaker yesterday with the RISK trade back in vogue, while the dollar index was lower by 0.17% on the day.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.38) and Sell Trade (87.11).  The VIX declined by 15.0%, but still remains in a bullish formation.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (29.86) and Sell Trade (45.21). 


Eurozone sentiment remains fragile as investors’ concerns about the effectiveness of the 750 billion euro rescue package mount.  Banks fear that the package may fail to stop the crisis spreading into the banking industry.  Over the last five days, banks have been depositing record amounts of cash with the European Central Bank.  According to media reports, this is because “nobody knows who the exposed individual financial institutions are”.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).


The Energy (XLE) sector recovered the bulk of Tuesday’s selloff and is now up 1.6% over the past week.  Energy commodities were among the best performers in the CRB, on the back of better economic data.   Yesterday, Natural Gas rallied 4% to close at $4.42.  The outperformance of natural gas seemed to provide additional support for the EPX up 6.8% and the S&P Coal Index up 7.8%.  BP was downgraded by Fitch to AA from AA+ on the heels of more negative developments regarding the oil spill.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.74) and Sell Trade (75.34).


The Financials (XLF) sector was another bright spot yesterday.  The banking group rebounded with BKX up 3.3%.  The regionals were among the best performers, fitting with the tendency to outperform with a pickup in risk.  Exchange stocks ICE +4.8% and CME +3.6% rallied on the back of strong May volume data. 


The Consumer Discretionary (XLY) slightly underperformed yesterday, but is the first sector to move back to positive on the TREND duration.  The retail group was another laggard today with the S&P Retail Index +1.5%.  Within XLY, the Homebuilders largely fared better however, with notable gainers such as DHI +3.1% and TOL +3%.  Yesterday we shorted TOL.   


Pending home sales rose a better-than-expected 6% in April, driven by the homebuyer tax credit expiration.   We've been beating the drum that home sales post the tax credit expiration would be anemic.  The MBA Mortgage Purchase Application Index - a leading indicator for home sales activity - continued its slide. The index declined 4.1% from last week, bringing the decline since April to 28.8%. The decline for the entire month of May is 18% vs. the month of April.


The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.03) and Sell Trade (3.16).    


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,204) and Sell Trade (1,237).   


As we look at today’s set up for the S&P 500, the range is 29 points or 1.9% (1,077) downside and 0.7% (1,106) upside.  Equity futures are trading above fair value in a continuation of Wednesday's solid gain which saw a return of the RISK trade.  Overnight, positive trends have been seen across Asia and Europe where risk appetite is returning.  A notable divergence was the 0.7% decline in the Shanghai Composite stock market. 


On the economic front to be reported today will be:

  • May ADP Employment Change
  • Initial Jobless Claims
  • April Factory Orders
  • May ISM Non-manufacturing Composite
  • Weekly natural gas inventories
  • DOE crude oil inventories

Howard Penney













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