US STRATEGY - SELECTIVE HEARING

The S&P finished slightly higher, up 0.1%, due in part to a stronger tape for Consumer Staples (XLP), Utilities (XLU) and Technology (XLK).  For the second day in a row, there were some positive developments on the RISK front out of Europe, offset by a weaker-than-expected economic picture in the US.

The market seemed to also ignore two leading indicators of growth - Copper and China.  Last night, China closed down 1.8% (down for the last two days) and is now down 23.3% year-to-date.  Yesterday, copper declined 3% and is trading down another 1% this morning to 2.88.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.71) and Sell Trade (3.00).

While the Materials sector (XLB) was down 0.5% yesterday, it’s up 1.9% over the past week despite the weakness in China.  Yesterday the XLB underperformed with another round of below-consensus guidance out of the steel stocks, with recovery concerns across the rest of the industrial metals groups.  Currently, the Materials (XLB) and Energy (XLE) look vulnerable.    

Oil declined by 1% yesterday to $76.79 and is indicating down 1.5% in early trading today.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($73.73) and Sell Trade ($79.59).

On the MACRO front, the US economic picture is also showing some signs of weakness.  Initial claims rose for a second straight week, increasing to 472,000 last week from an upwardly revised 460,000 in the prior week.  The RECOVERY trade was dealt a body blow with the Philadelphia Fed Index falling to 8 in June from 21.4 in May, the lowest level since August 2009 and below consensus expectations. 

For the second day in a row Consumer Discretionary (XLY down 0.6%) was the worst performing sector.  Within the XLY, housing-related stocks came under pressure again with the XHB down 2.4%.  May single-family housing starts fell a larger-than-expected 17.2% month-to-month, with a 10% decline in single-family permits.  To top it off, TOL was the worst performing stock down 4% on a cautious business trends. TOL noted that deposits have been trending 20% below year-earlier levels in the past three weeks, while per-community traffic has slipped 3% since the end of the last quarter. The company added that demand has been "quite choppy".  LOW declined 2.2% and was one of the worst performers in the S&P Retail Index, which declined 1.2% yesterday.  As a reminder, Hedgeye has been bearish on housing heading into the back half of this year and throughout 2011.

Despite some takeover speculation surrounding M&T Bank +9%, the banks and brokers were mostly weaker as additional clarity on some of the more onerous measures of the reform legislation is unlikely to come until next week.  The Financials (XLF) was one of the four sectors that declined yesterday, with the BKX down 0.4%. 

Treasuries were stronger with the weak economic data, but the VIX declined by 2%.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.38) and Sell Trade (32.09). The DXY declined by 0.4% yesterday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.11) and Sell Trade (86.57). 

So far this week, the EURO is up 1.96%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.21) and Sell Trade ($1.24).

Yesterday, Consumer Staples (XLP) was the best performing sector.  The sector seemed to benefit from the more defensive tone in the market.  Leading the XLP higher, KR was up 3.3% and SVU was up 6.1%, while SWY was up 1.7% after the company posted better-than-expected Q1 results. 

Gold remains in a bullish formation and we are long via GLD.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,231) and Sell Trade (1,248).   

As we look at today’s set up for the S&P 500, the range is 36 points or 1.5% (1,099) downside and 1.7% (1,135) upside.  Equity futures are trading below fair value as European markets are weakening and the news flow is light ahead of quadruple witching day. 

Howard Penney

US STRATEGY - SELECTIVE HEARING - S P

 

US STRATEGY - SELECTIVE HEARING - DOLLAR

 

US STRATEGY - SELECTIVE HEARING - VIX

 

US STRATEGY - SELECTIVE HEARING - OIL

 

US STRATEGY - SELECTIVE HEARING - GOLD

 

US STRATEGY - SELECTIVE HEARING - COPPER