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Yesterday stocks rallied, sending the Standard & Poor's 500 Index to the highest level since May 18.  The S&P 500 climbed 2.3% to 1,115.  On the MACRO front, there is a general pickup in the appetite for risk as the growth picture continues to improve.  It was reported yesterday, that the Federal Reserve Bank of New York's general economic index showed an 11th consecutive month of growth.

This RISK dynamic seemed to help US equities look past some weaker-than-expected economic data in Europe, along with Monday’s downgrade of Greece to junk by Moody's and continued speculation that Spain will need a bailout facility.  Greek 10-year bond yields jumped 74 basis points to 9.08%.

Treasuries were weaker today with the pickup in risk, as the VIX declined 9.7%.  The DXY declined 0.65% and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.88) and Sell Trade (86.46).  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (24.62) and Sell Trade (32.79).

The euro strengthened above $1.23 despite the larger-than-expected decline in German analyst and investor sentiment, as the ZEW index fell to 28.7 in June from 45.8 in May, the sharpest pullback since October 2008.  In early trading today, the euro is trading down slightly.  The inverse correlation between the euro and the TED spread weakened, day-over-day, going against the recent trend.  The TED spread narrowed this morning to 0.45.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.20) and Sell Trade ($1.23).

Oil rallied above $77 a barrel and the Reuters/Jefferies CRB Index of commodities posted a seventh straight gain, the longest stretch of gains since March 2007. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($73.59) and Sell Trade ($79.63).

The three best performing sectors were Industrials (XLI) +3.0%, Energy (XLE) + 2.9% and Technology +2.6%, with three sectors underperforming Utilities (XLU) +1.9%, Healthcare (XLV) +1.7% and Consumer Staples +1.0%.   The Hedgeye Risk Management S&P sector models had a positive day with 8 of 9 Sectors moving to positive on the immediate term TRADE, but still have 7 of 9 negative on TREND.

The data flow on US consumer trends and behavior continues to be negative.  After the close, the ABC Consumer Confidence Index declined to -45 from -43 last week.  Also, home builders in the U.S. turned more pessimistic in June; a sign that housing demand may be slowing even more than anticipated after a government tax credit expired. The National Association of Home Builders/Wells Fargo confidence index dropped to 17 from 22 in May, lower than all the estimates on Bloomberg and the biggest decrease since November 2008.  This data point, combined with a collapse in mortgage applications last week, augments our conviction that the housing market is going to struggle in 2H10. 

Outside of the RECOVERY/REFLATION trade, technology was one of the best performing sectors yesterday.  Most of the upside leadership for the XLK came from the semi group, with the SOX +5.5%; UMC +5.5% and TSM +4.3% were both out with positive comments regarding chip demand.   

The Financials (XLF) underperformed the most yesterday, as reform remains an overhang, particularly with talk of growing support for derivatives legislation and the Volcker Rule looking more like a sure thing.  Yesterday, the credit card names posted strong gains following the release of May master trust data, but the rally may be short lived with phase 3 of REG Z on the way.  Our Financials analyst Josh Steiner has a note out detailing what this all means. 

The retail group lagged the Consumer Discretionary Sector (XLY), with the S&P Retail Index +1.3%. Consumer electronics names underperformed with weaker-than-expected fiscal Q1 results out of BBY.

In early trading, copper is trading higher for a seventh day in a row on speculation that the economy remains robust in the U.S.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.88) and Sell Trade (3.05). 

Gold is looking higher in London on concern that Europe’s sovereign-debt crisis will continue to escalate.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,217) and Sell Trade (1,246).   

As we look at today’s set up for the S&P 500, the range is 21 points or 1.3% (1,101) downside and 0.6% (1,122) upside.  Equity futures are trading below fair value ahead of today's economic release which includes May PPI, Housing Starts and Industrial Production. 

Howard Penney

US STRATEGY – MARKETS DEFY CONSUMER SENTIMENT - S P

 

US STRATEGY – MARKETS DEFY CONSUMER SENTIMENT - DOLLAR

 

US STRATEGY – MARKETS DEFY CONSUMER SENTIMENT - VIX

 

US STRATEGY – MARKETS DEFY CONSUMER SENTIMENT - OIL

 

US STRATEGY – MARKETS DEFY CONSUMER SENTIMENT - GOLD

 

US STRATEGY – MARKETS DEFY CONSUMER SENTIMENT - COPPER