US STRATEGY – ON THE MARGIN

A key Hedgeye phrase is that “everything that matters happens on the margin.”  On the margin, the news in Europe is getting better (the Euro is rallying) and the news in the US is getting worse (the dollar is getting weaker) - this has been bullish for stocks so far this week.  Soon the news from the US will dominate the headlines and that will likely be bearish.  Yesterday, there was little follow through from Tuesday’s big rally, as the S&P 500 finished down slightly on Wednesday.  

 

Stocks were down as the EURO declined slightly, as another round of speculation emerged that Spain will have to tap the EU's new bailout facility.  The continued concerns surrounding Spain dampened some of the momentum behind the risk trade, but the demand for Spanish bonds in today’s auction is helping the Euro rally in early trading.  The EURO is currently trading up to 1.2388, up 0.6%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.21) and Sell Trade ($1.23).

 

Treasuries were stronger with the increased aversion for risk, as the VIX rose by 0.2%.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.32) and Sell Trade (32.33). The DXY rallied slightly and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.55) and Sell Trade (86.51). 

 

On the MACRO front in the US, weaker-than-expected housing data was another headwind for the market.   Housing starts posted a larger-than-expected 10% month-to-month decline to an annualized rate of 593,000 in May. The decline was entirely driven by single-family starts, which fell 17.2% to 468,000. Permits were down 5.9% in May and have now fallen 16% since the last peak in March.  In addition, single-family permits were down nearly 10%.

 

The Hedgeye Risk Management Financials team, led by Josh Steiner, hosts our next Black Book release and Conference Call, “Housing Double Dip a Game Changer for Financials in 2011” on Friday June 25th at 11 a.m. EDT.  The call is open to qualified institutional subscribers of Hedgeye's Financials vertical -- and for qualified prospective institutional subscribers. Email if you are interested in learning more about Josh Steiner’s Financials institutional research product.

 

The disappointing housing data contributed to Consumer Discretionary (XLY) being the worst performing sector on the day; followed by Consumer Staples (XLP) and Industrials (XLI).  The S&P homebuilding Index declined by 1.5%, lead by PHM down 1.8%.  The XLY was also hurt by the retail group underperforming the broader market again yesterday, with the S&P Retail Index (0.8%).   The Johnson/Redbook 2-week same-store sales were reported down 0.5% from May.  In addition, earlier in the week, BBY reported weaker-than-expected May quarter results along with continued cautious commentary surrounding consumer spending trends.

 

The three best performing sectors were Technology (XLK) +0.3%, Healthcare (XLV) +0.4% and Utilities +0.6%.   The XLK topped the list of best performing sectors on the back of the AAPL and iPhone sales trends and was able to shrug off a sharp selloff in NOK (10.7%) after the company cut its Q2 outlook.  For the second day in a row, memory names MU +2.2% and SNDK +1.4% helped the SOX +0.4% extend its rally another day. 

 

Oil rallied to $77.67 and the Reuters/Jefferies CRB Index of Commodities posted a sixth straight gain.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($75.46) and Sell Trade ($79.60).

 

Copper continues to flash a bearish signal for US/Global growth; selling off this morning to $2.96, well below our long term TAIL line of 3.05.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.89) and Sell Trade (3.05). 

 

Gold remains in a bullish formation and we are long.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,218) and Sell Trade (1,244).   

 

As we look at today’s set up for the S&P 500, the range is 26 points or 1.2% (1,101) downside and 1.1% (1,127) upside.  Equity futures are trading mixed-to-fair value having finished lower yesterday.  On the docket for today is May's CPI and initial jobless claims.   

 

Howard Penney

 

US STRATEGY – ON THE MARGIN - S P

 

US STRATEGY – ON THE MARGIN - DOLLAR

 

US STRATEGY – ON THE MARGIN - VIX

 

US STRATEGY – ON THE MARGIN - OIL

 

US STRATEGY – ON THE MARGIN - GOLD

 

US STRATEGY – ON THE MARGIN - COPPER