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The S&P 500 finished lower by 0.3% on a largely uneventful Wednesday.  Day-over-day not much has changed globally and the markets are settling into the current pattern of events.  In the US the FED remains conflicted and compromised, European sovereign debt issues are not going away (but part of the consensus thinking), and China is strong but slowing.  What is the next catalyst up or down?  We will be hosting our 3Q THEME call next Thursday, July 1st at 11am.

The market rallied slightly on the fact that the FED’s continued free money policy was a sign of strength, and the slightly more downbeat assessment of the US economic economy was nothing to worry about. The FOMC noted that the "economic recovery is proceeding," while its prior statement argued that "economic activity has continued to strengthen." In addition, it pointed out that "financial conditions have become less supportive of economic growth," after noting in late-April that "financial markets remain supportive of economic growth."

Europe is trading lower today, as a more pronounced shift towards fiscal tightening is gaining momentum ahead of the G-20 meeting, particularly with countries such as Germany, which announced a new austerity package in early June.  Germany is also coming under some pressure for not doing more to underpin domestic demand.

In the US the string of disappointing May housing data continued, as new home sales plunged 33% month-to-month to a 300,000 unit annualized pace, the lowest on record. In addition, new home sales for March and April both saw double-digit downward revisions; months' supply jumped to 8.5 in May from 5.8 in April.  After five days of underperforming, housing-related stocks bounced with the XHB +1.2%. 

The RISK trade failed to garner any meaningful momentum, as treasuries rallied again today.  The dollar index was down 0.42% and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.06) and Sell Trade (86.66).  The VIX traded flat on the day; the Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.65) and Sell Trade (31.76).

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).

Leading the market lower yesterday was the Utilities (XLU -0.9%), Energy (XLE -0.8%) and Financials (XLF -0.4%), while the only two sectors up on the day were Materials (XLB +0.2%) and Consumer Staples (XLP +0.6%).  The XLP is now positive on TRADE, putting a total of six sectors positive on TRADE.

The energy sector was one of the worst performers again today, as energy commodities were weaker on the day.  Outside of natural gas, Copper and oil declined over 1% on the day.  August crude declined 1.9%, suffering its biggest one-day pullback in almost two weeks.  Crude stockpiles rose by just over 2M barrels to 365.1M last week, the highest level for the period since 1990. In addition, regulatory headwinds remained in focus with Interior Secretary Ken Salazar expected to reissue a deepwater drilling moratorium that was recently blocked by a federal judge in Louisiana. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (73.96) and Sell Trade (79.63).  

So far in 2010, copper is down 11%, but the recent weakness in the dollar is helping to provide some support.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.87) and Sell Trade (3.05).

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,216) and Sell Trade (1,256).  

As we look at today’s set up for the S&P 500, the range is 24 points or 1.0% (1,081) downside and 1.2% (1,105) upside.  Equity futures are trading below fair value following the weakness in Europe and Asia.  Today’s focus will be on a handful of company earnings reports and initial jobless claims and durable good numbers. 

Howard Penney

US STRATEGY – LESS SUPPORTIVE - S P

 

US STRATEGY – LESS SUPPORTIVE - DOLLAR

 

US STRATEGY – LESS SUPPORTIVE - VIX

 

US STRATEGY – LESS SUPPORTIVE - OIL

 

US STRATEGY – LESS SUPPORTIVE - GOLD

 

US STRATEGY – LESS SUPPORTIVE - COPPER