US STRATEGY – DEJA VU

Seems like old times - “dollar down, stocks up...”  With the buck burning again, the Reflation Trade is in play.

 

Yesterday, US equities rallied hard, with the Dow, S&P and NASDAQ all finishing higher for a sixth straight session.  Over the past month the dollar is down 4.4% and the S&P 500 is up 6.5% as of last night close.  Reflation is back, but this time China is not leading the way and neither is copper.  Last night China was only up 0.8% (down 24.6% YTD) and copper managed to squeak out a 0.3% gain (down 9.8% YTD).  China is due to report its GDP number tomorrow, with likely commentary about any changes to their policies measures.  Will they save the planet a second time? 

 

Yesterday, the S&P 500 benefitted by the largely favorable takeaways from the early commentary from the June quarter earnings season.  Despite the signs of slowing global growth, early company commentary is helping to dampen the MACRO headwinds from past two weeks.  Even Moody's downgrade of Portugal had little or no impact on sentiment.  Accelerating M&A trends and the likelihood of a resolution for financial reform was also a net positive.

 

Yesterday, treasuries were weaker with the rally stocks and a disappointing 10-year note auction.  The increased appetite for risk was not confirmed in the yesterday’s performance in the VIX; the VIX rose 0.5% yesterday, but is down 14.7% over the past month.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.69) and Sell Trade (28.97).

 

The dollar index continues to get smoked, trading down 0.7% yesterday and is trading lower again today.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.64) and Sell Trade (84.04).

 

Apparently the "euro parity" call is being trumped by the US Dollar being debauched again; the EURO closed up 0.9% yesterday, closing at 1.27.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.28).

 

The three best performing sectors yesterday were Materials (XLB), Consumer Discretionary (XLY), and Financials (XLF).  The Materials (XLB) benefited from its leverage to the RISK/RECOVERY trade; AA helped underpin sentiment following its 2Q10 earnings release.  The company also raised its 2010 global aluminum demand forecast.  Steel and Paper and forest products names also rallied sharply yesterday.

 

Consumer Discretionary (XLY) outperformed Consumer Staples (XLP) by 1.4%.  Housing-leveraged stocks were among the standouts with the XHB up 3.9%.  A notable stand out was USG, up 10% on the day.  Upscale retailers outperformed the dollar stores and discounters. 

 

Financials (XLF) put in a strong performance yesterday, ahead of JPM earnings due out on Thursday.  The issues surrounding regulatory overhang was the biggest positive for the sector in the wake of confirmation that the Democrats have the necessary votes to pass reform legislation later this week. The regional names were the best performers in the BKX, but the money-center banks also outperformed the overall market. 

Copper gained for the sixth time in seven days yesterday.  The Hedgeye Risk Management models have the following levels for COPPER – Buy Trade (2.87) and Sell Trade (3.20).

 

Yesterday, gold rose the most in three weeks.  Gold is currently trading at $1,213 per ounce.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,186) and Sell Trade (1,217). 

 

In a sign that global growth might not be slowing, crude oil rose to the highest level in more than two weeks.  Ironically, the IEA reported today that is forecasts for world oil demand to slow in 2011.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (75.21) and Sell Trade (78.54).  

 

As we look at today’s set up for the S&P 500, the range is 32 points or 1.9% (1,074) downside and 1.0% (1,106) upside.   Equity futures are trading above fair value, supported by Intel’s results last night.  On the MACRO calendar today:

  • MBA Mortgage Applications
  • US Import Prices (June) - Consensus (0.3%)
  • US Export Prices (June) - Consensus 0.1%
  • US Retail Sales (June) - Consensus (0.2%); ex-autos (0.1%)
  • US Business Inventories (May) - Consensus 0.3%
  • DOE Crude Oil Inventories released
  • Treasury Auctions in 30-yr bonds

Howard Penney

 

US STRATEGY –  DEJA VU - S P

 

US STRATEGY –  DEJA VU - DOLLAR

 

US STRATEGY –  DEJA VU - VIX

 

US STRATEGY –  DEJA VU - OIL

 

US STRATEGY –  DEJA VU - GOLD

 

US STRATEGY –  DEJA VU - COPPER


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