US STRATEGY – BEAR MARKET MACRO

Continuing a trend from last week the MACRO calendar continues to provide us with disappointing news.  Yesterday, the ISM non-manufacturing index fell to a four-month low of 53.8 in June from 55.4 in May, as new orders fell for a third straight month, declining to 54.4 from 57.1 in May.  The biggest concern was the demand outlook as order backlogs slipped to 55.5 from 56 and the employment index edged back below 49.7 from 50.4 in May.

Despite this, the S&P 500 experienced a Bear Market Macro bounce, as the S&P 500 finished higher by 0.54%.  The upside was driven by the strength in global markets, especially China.  The euphoria faded as the Consumer Discretionary (XLY) names underperformed heading into same-store sales Thursday.  The XLY was the only sector to be flat on the day.

The biggest divergence yesterday was the decline in the Russell 2000 which declined 1.5%.  Within the small cap space the S&P 600 Restaurant Index declined 3.6% on the day.  Yesterday, the S&P Retail Index declined 0.5% on a flurry of June same-store sales previews which focused on the favorable impact from the calendar shift, but raised concerns over 2H10 expectations.

The RISK AVERSION trade was evident yesterday as Treasuries were stronger with some help from the weaker-than-expected non-manufacturing ISM data.  The dollar index closed lower, closing at $84.03 down 0.62%.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.80) and Sell Trade (85.18).  The VIX moved lower by 1.5% - the Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (25.65) and Sell Trade (30.61).

With a sharp decline in the Dollar index, it’s worth noting a big spike in the euro - the euro traded up 10.87%, closing at 1.26.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.28).

The three best performing sectors yesterday were Utilities (XLU up 1.2%), Energy (XLE up 1.0%) and Technology (XLK up 1.0%).  The oil services group finished higher for a fourth straight session with the OSX +0.5%.  Despite a reversal in natural gas, coal stocks still finished mostly higher with some help from M&A activity.

The XLK outperformed as the S&P Software index rose 1.8% on the day, with CTXS +2.5%, MSFT +2.4%, ORCL +2.2% and RHT +1.8%.   

The Materials (XLB) was a laggard, weighed down by the paper and forest products group, where falling pulp prices have gained some attention.   The S&P Steel Index also declined by 0.8% on the day. 

In early trading copper is trading down for the first time in four days as the dollar is rallying.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.83) and Sell Trade (2.98).

In early trading gold is trading at a six-week low.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,187) and Sell Trade (1,229). 

The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.79) and Sell Trade (75.29). A slowing global growth outlook and a cyclical build-up in U.S. stocks are exerting downward pressure on the price of oil. 

As we look at today’s set up for the S&P 500, the range is 50 points or 2.6% (1,001) downside and 2.2% (1,051) upside.   Equity futures are trading below fair value continuing the weakness from yesterday afternoon.  On the Macro Calendar today, we have MBA Mortgage Purchase Applications.

Howard Penney

US STRATEGY – BEAR MARKET MACRO - S P

 

US STRATEGY – BEAR MARKET MACRO - DOLLAR

 

US STRATEGY – BEAR MARKET MACRO - VIX

 

US STRATEGY – BEAR MARKET MACRO - OIL

 

US STRATEGY – BEAR MARKET MACRO - GOLD

 

US STRATEGY – BEAR MARKET MACRO - COPPER