Yesterday the Russell 2000, S&P 500, NASDAQ and Dow Jones were the four best performing indices globally.  For the time being, fears of a “double-dip” are being dismissed due in part to yesterday’s retail sales figure and today’s news that the IMF is raising its 2010 world growth forecast.  The retail sales data on Wednesday showed the strongest pace of growth in four years.  Despite the reported good news for the consumer, the Consumer Discretionary sector (XLY) unperformed on the day.  Yesterday’s 3.1% move in the S&P 500 came on an unconvincing 1% sequential improvement in volume.       


Overnight there was some follow-through in Asia; Japan was up 2.8%.  India (up 1%), Hong Kong (up 1%), and Australia (up 2.25%) also showed strength.  China declined 0.25% on the day amid speculation that China would implement a new round of property market tightening measures.  


In Europe, the supposed transparency and credibility surrounding the European bank stress tests also helped to underpin sentiment.  While the euro has traded higher in four of the last five days, it closed down 0.24% yesterday at 1.26.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.27).


Yesterday, treasuries were weaker with the dampened risk aversion in the markets.  The VIX declined 9.5% yesterday: a 22.3% decline over the past week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (25.01) and Sell Trade (29.99).


The dollar index was down 0.31% breaking our intermediate term TREND line of $83.96. It is now down -5.5% since the Hedgeye Q3 Macro theme of American Austerity started.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.35) and Sell Trade (84.96).


Looking at the sector performance, the Financials (XLF +4.4%), Materials (XLB +4.0%) and Energy (XLE +3.5%) were the three best performing sectors.  While Consumer Discretionary (XLY +2.8%), Healthcare (XLV +2%), Consumer Staples (XLP +1.9%) were the bottom three. 


Driving the XLF higher was the banking group as the BKX posted its biggest one-day gain today since May 10th.  The Trust names NTRS +6.9% and BK +6.4% were among the standouts in the group following the positive Q2 pre-announcement from STT.  Regional banks outperformed with the pickup in risk appetite; the KRE was up 4.5%.


Yesterday, we shorted the Industrials (XLI) into the significant outperformance.  The S&P steel index rose 6%; the industrial metals names have some of the best leverage to the risk/recovery trade.  Our GDP growth forecast remains below consensus.


The consumer related names underperformed as the risk aversion trade saw a move into higher beta names.  The low priced retailers and dollar stores provided the big headwind for the retail space.  With retail sales being reported today, it’s expected to be one of the more influential directional drivers for the broader market today. 


Commodity related equities outperformed, despite OIL and Copper being broken on TREND and TRADE.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.83) and Sell Trade (3.09).


Yesterday GOLD fell to $1,185 an ounce yesterday, the lowest price since May 24, before rebounding to close above $1,200.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,180) and Sell Trade (1,229). 


Oil continues to trade higher as the Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.51) and Sell Trade (75.28).  


As we look at today’s set up for the S&P 500, the range is 71 points or 5.2% (1,005) downside and 1.5% (1,076) upside.   Equity futures are trading mixed to below fair value ahead of the initial jobless claims number. 


Howard Penney













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