US STRATEGY – UNCONVINCING

The S&P 500 finished higher (up 0.4%) on Thursday, but the move was choppy and unconvincing.  The RISK trade continues to outperform, but the underlying risk factors don’t support the move as volatility continues to reflect the heightened uncertainty surrounding a number of key MACRO drivers for stocks.

Some of the unsettling factors are:

(1)    Volume declining sequentially for three straight days.

(2)    Negative Advance/Decline line.

(3)    VIX declined yesterday, but is in a bullish formation.

(4)    The DXY is up, Euro down.

(5)    Copper is down for four straight days - Broken on TRADE and TREND.

(6)    China is still in CRASH territory.

(7)    Hedgeye RM sector studies are bearish

(8)    Three-month LIBOR has risen to 0.5378%

(9)    Although it has come in today, the TED spread has widened considerably this week

The potential contagion from the fiscal pressures in countries throughout Europe will continue to plague the financial sector.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).  The Financials (XLF) was one of two sectors that declined yesterday.

The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.52) and Sell Trade (87.63).  The VIX declined by 2.3%, but still remains in a bullish formation.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (29.11) and Sell Trade (41.12). 

While the CRB rallied by 0.83% yesterday, the impact from China's efforts to cool an overheating property market and the earnings hit from the Gulf of Mexico moratorium may not completely factored in to commodity demand, which may suggest further downside.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.20) and Sell Trade (76.12).

The Materials (XLB) sector was the worst performer yesterday and the other sector that declined alongside the Financials (XLF).  China seemed to be one of the bigger drivers of today's pullback in the industrial metals and related equities.  Yesterday, Copper declined 3% and is looking down for four straight days.  Copper is now down 9.7% year-to-date.  The Ag chemicals group also came under some pressure today with CF (3.5%) and MOS (3.4%) among the worst performers.  A notable divergence in the REFLATION trade was the Energy sector (XLE), which caught a bid as crude rose 2.4%.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.03). 

A notable standout to the upside was Technology (XLK); the software group was one of the bright spots in the sector.   The Internet group also fared well with EBAY +4.4%, GOOG +2.5%, YHOO +1.7%, and DELL +4.9%.  Dell Inc. Chief Executive Officer Michael Dell said he has considered taking the company private.  After rallying more than 3.5% on Wednesday, the semi group finished higher again today with the SOX +1.2%; the semi-cap equipment names were among the best performers in the group.

Looking at the Hedgeye sector models, the Consumer Discretionary (XLY) remains the only sector that is positive on TREND, although the underlying names are running into a brick wall.  Yesterday’s May same-store sales data did not seem to provide any meaningful overall direction for the S&P Retail Index, which underperformed.  The Thomson Reuters same-store sales index rose 2.5% in May vs. consensus expectations for a 2.6% increase. While total comps came in below expectations for a second straight month, a number of companies noted a pickup in sales in the back half of the month stemming from better weather.

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,202) and Sell Trade (1,237).   

As we look at today’s set up for the S&P 500, the range is 34 points or 2.3% (1,077) downside and 0.7% (1,111) upside.  Equity futures are trading above fair value after posting their first consecutive gain in over a month with investors poised for May's nonfarm payrolls due at 08:30am.

On the economic front to be reported today will be:

  • Euro zone Q1 preliminary GDP +0.6% y/y vs. consensus 0.5%
  • US Nonfarm Payrolls (May) consensus 500K
  • US Private Payrolls (May) consensus 175K
  • US Manufacturing Payrolls (May) consensus 35K
  • US Unemployment Rate (May) consensus 9.8%
  • US Average Hourly Earnings MoM (May) consensus 0.1%
  • US Average Weekly Hours (May) consensus 34.1

Howard Penney

US STRATEGY – UNCONVINCING - S P

 

US STRATEGY – UNCONVINCING - DOLLAR

 

US STRATEGY – UNCONVINCING - VIX

 

US STRATEGY – UNCONVINCING - OIL

 

US STRATEGY – UNCONVINCING - GOLD

 

US STRATEGY – UNCONVINCING - COPPER