US STRATEGY – REACHING FOR RISK

Yesterday, the S&P 500 finished higher by 0.9%, bringing the three day rally to 4.6%.  It should be noted that volume has declined by 9% during the same time period.  The Hedgeye sector models now have three (XLV, XLP and XLU) sectors positive on TRADE and one positive (XLU) on TREND.

While the three sectors that are positive on TRADE are low beta sectors, the past three days have seen a pickup in the RISK trade.  While the MACRO data of late clearly points to slowing global growth, yesterday’s “headline” initial jobless claims print was positive.  While Initial claims this week fell 21k (18k net of the revision), the positive print continued the volatile pattern of the last four weeks, in which the week-over-week change has been more than 15k up or down each week.  Importantly, the more notable four-week rolling average decreased, by only 1k, to 466k.  For another week, claims remain in the 450-470k range they've occupied for most of the year, well above the 375-400k range needed for unemployment to materially improve.  

In addition, although the IMF upgraded its 2010 global growth forecast, it also noted downside risks to the path of recovery from the Euro zone debt crisis. The ECB left its key policy rate unchanged at 1%, as was expected. Economists highlighted a slightly more optimistic tone from ECB President Trichet, who downplayed double-dip and financial instability concerns.  As a result, the euro climbed above $1.27 for the first time since May.  The Hedgeye Risk Management models have the following levels for the euro – Buy Trade (1.22) and Sell Trade (1.28).

For the second day in a row, treasuries were weaker with the dampened risk aversion in the markets and the VIX declined 4.2% yesterday. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (24.29) and Sell Trade (29.76).

The dollar index traded in a tight range yesterday and closed flat on the day.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.52) and Sell Trade (83.98).

While the June same-store sales data appeared to be strong on the surface, the trends failed to provide any meaningful overall direction for the market or consumer centric stocks.  The Thompson Reuters Same Store Sales Index posted a +3.1% comp in June, just below the +3.2% consensus.  Importantly, there were no hints in the June data that would alleviate the 2H10 concerns surrounding difficult comps and discounting trends.

Also yesterday, as noted by our Financials analyst Josh Steiner, “the government released its G-19 data, which measures non-mortgage consumer credit (credit card, auto and student loan debt). The May data remained staunchly negative for the Financials (XLF) industry. Revolving consumer credit (card debt) declined 10.5% in May, marking the 20th sequential month of decline.  Last month, we highlighted the flattening of overall non-mortgage debt, but the most recent data revision wiped out that silver lining. “

The best performing sectors yesterday were the ones levered to the RISK/RECOVERY trade - Materials (XLB) and Energy (ELE).  Mixed in with the RECOVERY trade, the Consumer Staples rose 1.5% on the day.  Tobacco stocks provided some upside leadership for the sector (RAI +2.7%, LO +2.3%, PM +2.1% and MO +2.1%).  The drug stores were another bright spot today with RAD +6.7% and WAG +3.6% outperforming. 

Significant concerns about global growth continue to keep copper from rallying.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.09).

Gold is heading for a third straight weekly decline, on speculation that a rebound in the euro will reduce demand.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,083) and Sell Trade (1,220). 

Crude oil rose to a one-week high as U.S. inventories tumbled after Hurricane Alex disrupted output and deliveries in the Gulf of Mexico.   The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.48) and Sell Trade (78.78).  

As we look at today’s set up for the S&P 500, the range is 71 points or 6.1% (1,005) downside and 0.5% (1,076) upside.   Equity futures are trading mixed to fair value after the S&P 500 0.9% gain yesterday.  Today is light on headline MACRO news with only Wholesale Inventories and Wholesale Sales to be reported. 

Howard Penney

US STRATEGY – REACHING FOR RISK - S P

 

US STRATEGY – REACHING FOR RISK - DOLLAR

 

US STRATEGY – REACHING FOR RISK - VIX

 

US STRATEGY – REACHING FOR RISK - OIL

 

US STRATEGY – REACHING FOR RISK - GOLD

 

US STRATEGY – REACHING FOR RISK - COPPER