US STRATEGY – EXCEPTIONAL UNDERPERFORMANCE

For the second day in a row the USA was one of the worst performing markets in the world.  The worst performing market was Luxembourg, which was down 2.8%, as compared to the Russell 2000 down 2.1% and the S&P 500 down 1.6%.  Volume on the NYSE was up 5% day-over-day, but remains at very low levels.  All of the major indexes closed around their worst levels for the session, with the S&P 500 back below its 200-day moving average.

 

All nine S&P 500 sectors declined yesterday and it was a nasty day for the Hedgeye S&P 500 Sector Risk Management model; four sectors broke their intermediate term TREND lines (XLY, XLP, XLI, and XLF) and there are currently no sectors positive on TREND. 

 

There are some key MACRO data points coming up in the next 10 days.  First, we have today’s FOMC meeting.  The FOMC is widely expected to leave the federal funds rate unchanged at 0-0.25% and reiterate its long-standing compromised policy that rates will remain exceptionally low for an extended period.  The FED’s policy statement will likely point to the recent weakness in inflation and the MACRO headwinds from Europe as the primary reason to keep rates low.  Second, there is a G-20 meeting this weekend and third, next Friday we have the release of June employment data.  Following that we kickoff Q2 earnings season.

 

In Washington the Obama administration is appearing more dysfunctional by the day and there continues to be lingering uncertainty surrounding some of the more onerous provisions in the financial reform legislation, which remain an overhang on sentiment.  Also hurting the Financials (XLF) and Consumer Discretionary (XLY) are the heightened concerns about a double-dip in housing following another round of weaker-than-expected May data.  Existing home sales fell 2.2% to a 5.66M unit annualized pace in May, well below the 6.2M consensus.

 

Of the four sectors that are broken on TRADE and TREND, two are consumer related - XLP and XLY.  Over the past week the XLY is down 4.9%, as compared to the S&P 500 down 1.8%.  Yesterday, for the fifth straight day, housing-related stocks finished lower, with the S&P Homebuilders index down 2.9%. In addition to the home builders, companies leverage to housing were notable decliners; USG (6.9%) and AWI (4.5%), LOW (3.3%) and HD (2.6%).  In addition, the S&P Retail Index (2%) finished lower for a fifth straight session, highlighting some concerns about a recent slowdown in discretionary spending.

 

Restaurant stocks were among the worst performers in the consumer discretionary sector today. Notable decliners included casual diners RT (5.4%), RRGB (5.1%), PFCB (4.4%), BWLD (3.6%) and TXRH (3.2%).  The underperformance was triggered on Monday after CPKI (2.4%), said that May-June comps fell considerable from the trends in Q1.  In the QSR space SONC declined (8.3%) also after posting some disappointing numbers. 

 

Treasuries rallied today with the weaker-than-expected housing data, an afternoon selloff in stocks and a strong two-year note auction.  The DXY rose by 0.2% yesterday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.07) and Sell Trade (86.67).  The VIX moved higher for the second day in a row by 8.7%.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.56) and Sell Trade (31.92).

 

The Euro is starting to stabilize on the immediate term risk management model; 1.22 is an important support that needs to hold.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24).

 

The best acting sector yesterday was Technology (XLK), down only 0.9%.  The outperformance was driven by AAPL +1.4%, as the company announced that it has shipped 3M iPad units in the 80 days since its early-April launch.

 

The Energy (XLE) sector was the worst performing sector yesterday, down 2.9%.  Both crude and natural gas declined yesterday; with natural gas down for a third straight day.  The E&P group was a notable decliner, with the EPX down 4.5% and the OSX declined 3.5%.  The group failed to garner any reprieve from news that a federal judge in New Orleans lifted the Obama administration's six-month moratorium on deepwater drilling.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($77.09) and Sell Trade ($79.54).

 

In early trading Copper is directionless, after yesterdays 1.7% move to the upside.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.05).

 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,233) and Sell Trade (1,256).  

 

As we look at today’s set up for the S&P 500, the range is 42 points or 0.8% (1,087) downside and 3.1% (1,129) upside.  Equity futures are trading above fair value after an ugly day yesterday.  Today's highlight is the FOMC rate decision although no material change to the Fed's "extended period" language is expected.

 

Howard Penney

 

US STRATEGY – EXCEPTIONAL UNDERPERFORMANCE - S P

 

US STRATEGY – EXCEPTIONAL UNDERPERFORMANCE - DOLLAR

 

US STRATEGY – EXCEPTIONAL UNDERPERFORMANCE - VIX

 

US STRATEGY – EXCEPTIONAL UNDERPERFORMANCE - OIL

 

US STRATEGY – EXCEPTIONAL UNDERPERFORMANCE - GOLD

 

US STRATEGY – EXCEPTIONAL UNDERPERFORMANCE - COPPER