Vermilion Macro Vision: Bullish trends intact; Technology Leading
STRATEGY: UP AND AWAYThe market's bounce off of the December, 2018 low was a swift “V†reversal. While we often see a retest of such events, our outlook since that time has repeatedly suggested that a retest may not occur. The reason has to do with the percentage of stocks trading above their 200-day moving average. We have only reached oversold extremes similar to what we saw in Q4, 2018 once since the 2009 low. At that time, which was 2011, and on the back of perceived, further, economic weakness (remember Operation Twist and QE#), the market sold off and reached similarly oversold extremes as the percentage of stocks trading above their 200-day moving average was pinned to single digits. In other words the selling overshot, and investors came back which resulting in the “V†reversal we experienced in Q4, 2018. At the end of last year, market participants began to believe the Fed was too aggressive, which resulted in the slight front-end inversion on the Treasury yield curve. The subsequent decline in rates, 2s through 10s, has likely also benefited equity markets and helped to propel the reversal.
At the beginning of last year our view was that we were likely to experience market conditions similar to 1994, in which the opposing political party would likely win the House, and the market would suffer a growth recession which was the term coined in 1994 to explain the sideways movement of the market. However recall that the following year, 1995, was a huge breakout year and the market turned in dazzling returns for investors. Led by Technology and the advent of the internet boom, the market raced to new highs. While we can't say that this will happen again, we do believe that if the U.S. dollar were to weaken marginally, emerging markets would benefit, which in turn would aid global markets and, usher in an advance that could lift the late stage cyclicals. In our view, this is a possibility which may be overlooked.
The U.S. dollar however has provided for many mixed signals in our view. It appeared to have run into a ceiling at the $97.71 level, which was the high set on December 14, 2018. We once again tested that level on March 7, 2019 and failed to break through. We view a break above this resistance level as bullish for the U.S. Dollar and bearish for emerging markets. Inversely, we believe global markets would benefit greatly if the U.S. dollar would either consolidate below the $97.71 level or decline gradually below the $96.16 level which would be the next support level put in by the February 28, 2019 low.
We continue to believe the market remains healthy with overall and leadership remaining centered in the growth Sectors, mainly Technology, although Industrials are strengthening, but not yet an overweight. As indicated in our past several Compass reports, areas of the market that have given us the greatest concerns last year, have made bottoms. Specifically, we were greatly concerned that goods which required long-term financing were stuck in downtrends and that the specter of higher rates was greatly impacting these interest sensitive areas of the market. These areas are: housing, autos, furniture, building products, trucks, and agricultural equipment. While we don't need these areas to lead, we would prefer they not continue to trade near their 52 week lows.
High yield spreads have narrowed substantially and suggest risk/reward is favorable and a recession is not in the cards. We often use high yield ETF's as a proxy of investors' appetite towards risk and the potential for recession. These issues have bounced dramatically from their lows and continue to suggest the market is digesting the possibility of escaping from the jaws of a potential recession.
Below is a synopsis our current observations on various aspects of the market, which we rely on as a checklist to help gage the health of the market, and where to find leadership.
• U.S. Dollar: The U.S. dollar has been considerably stronger than we had expected and has developed an ascending triangle. While it has yet to break topside of the important $97.71 level, we continue to believe the emerging markets have bottomed and the strength in the U.S. Dollar index really represents the weakness in industrialized markets such as Europe. In fact the trade weighted Dollar is near historical highs and, while it is a huge base, the ability for a breakout may be muted.
• Defensive areas of the market continue to weaken: As indicated above, we are downgrading the staples Sector to an underweight. Utilities are breaking to new highs, but RS has languished. The back drop for higher rates is currently muted as the fed remains in pause mode. With many European countries posting negative yields on the short end of the curve, perhaps our rates remain too high vs. the rest of the world.
• Percentage of stocks above their respective 50-day and 200-day moving averages: As indicated in our Compass last week, we had reached overbought levels and likely due a pullback, which has since occurred. We continue to believe the lows are in, and despite the recent pullback, we continue to believe the market overall remains healthy.
• Large vs Small-Caps: Thus far small-caps have led off the bottom, but they have also suffered a setback last week vs. large caps. The Russell 2000 vs. S&P 500 ratio has pulled back to logical support and we expect that this is nothing more than being overbought at this time.
• Interest rates: Despite the Fed tightening, 10-year rates have declined and are now range bound between the 2.6% and 2.8% range. The short end of the curve remains inverted and still creates mixed messages, however the equity markets have now become accustomed to this and, much like Europe who has had an inverted yield curve at the short-end for some time, is becoming the norm apparently. Corporate bond spreads have come down dramatically and are at a major area of support. We view this as a positive and an encouraging sign for the equity markets.
• Commodities: We are beginning to see formations that suggest a bottoming process is taking place. In names such as DWDP and DVN there are visible Head and Shoulders bottoms that are forming and, as with most major bottoms, it often takes time to develop formidable bottoms in all sectors at the same time. Despite lows having been made in the late cyclicals, it appears they are developing bullish bottoms and we will continue to adjust our weightings in accordance with RS inflections.
• Emerging markets and European Markets continue to bottom: As indicated over the past several months, China (FXI) and the emerging markets (EEM) have bottomed and pulled back to logical support levels. We continue to believe it is an opportune time to enter these markets. European markets are also bottoming and as we have often said, Bull markets are most often associated as having the Financial Sector developing bottoms or having bullish characteristics. While they do not have to lead, finding formidable bullish reversals are paramount to having a bull market. The EUFN ETF does have a bullish head-and-shoulders bottom and a pullback to the breakout.
• FANG: It appears that FAANG stocks have bottomed and are currently range bound. We believe without any downward pressure from these market cap behemoths, the market may indeed reach new highs.
We remain positive on the U.S. market, and last week's pullback has corrected much of its earlier overbought status. Defensive areas of the market are succumbing to growth in terms of performance. In light of this we are making the following changes to our Sectors weighting recommendations:
• Upgrading Materials to a market weight from underweight. The XLB and RTM have each developed bullish flag patterns and, as suggested in our 03/04/2019 Compass, we would be upgrading Materials on a pullback. RS does not yet suggest leadership, but is gradually improving.
• Downgrading Staples to underweight from market weight. The Staples Sector has pulled back to its 200-day moving average as based on the XLP ETF but, against our bullish overall outlook, we believe the market is likely to continue to improve and would increasingly look at those Sectors that benefit from a global expansion.
• Downgrading Healthcare to market weight from overweight. This Sector does have some areas of strength, however as a whole the Sector is showing relative underperformance.
A10 Networks is a provider of secure application solutions and services. The company's customers include cloud providers, web-scale businesses, and service providers. The company's product portfolio consists of six secure application solutions, which includes Thunder Application Delivery Controllers (ADC), Lightning ADC, Thunder Carrier Grade Networking, Thunder Threat Protection System, Thunder SSL Insight, and Thunder Convergent Firewall, and two intelligent management and automation tools, which includes Harmony Controller and aGalaxy. The company's solutions are available in a variety of form factors, such as optimized hardware appliances, bare metal software, virtual appliances and cloud-native software.
Alphabet is a holding company. Through its subsidiaries, the company is engaged in a collection of businesses, which its primary business is Google. The company reports all non-Google businesses collectively as Other Bets. Google's main products and platforms are Android, Chrome, Gmail, Google Drive, Google Maps, Google Play, Search, and YouTube. The company also provides advertisers with tools that help them attribute and measure their advertising campaigns. In addition, Other Bets includes Access, Calico, CapitalG, GV, Verily, Waymo, and X, among others. Other Bets primarily engages in the sales of internet and TV services through Access as well as licensing and research and development services through Verily.
Amazon.com serves consumers through its online and physical stores. The company also manufactures and sells electronic devices, including Kindle, Fire tablet, Fire TV, Echo, and Ring, and the company develops and produces media content. The company operates customer service centers and provides programs that enable sellers to grow their businesses, sell their products in its stores, and fulfill orders through the company The company serves developers and enterprises of various sizes, including start-ups, government agencies, and academic institutions, through its Amazon Web Services segment, which provides a set of global compute, storage, database, and other service offerings. The company also provides services, such as advertising.
Analog Devices is an analog technology company. The company designs, manufactures, and markets a portfolio of solutions, including integrated circuits, algorithms, software, and subsystems. The company's analog products include data converter that translate real-world analog signals into digital data and also translate digital data into analog signals, amplifiers that condition analog signals, and power management and reference products that include functions such as power conversion, driver monitoring, sequencing and energy management. The company's digital signal processing products are designed to execute software programs, or algorithms, associated with processing digitized real-time, real-world data.
Apple designs, manufactures and markets smartphones, personal computers, tablets, wearables and accessories, and sells a variety of related services. The company's products include: iPhone; Mac; iPad; and wearables, home and accessories, which includes AirPods?, Apple TV?, Apple Watch?, Beats? products, HomePod?, iPod touch? and other Apple-branded and third-party accessories. The company's services include: digital content stores and streaming services; AppleCare, which includes AppleCare + (AC+) and the AppleCare Protection Plan; iCloud, which is the company's cloud service; licensing; and other services, which include Apple Arcade?, Apple Card?, Apple News+, and Apple Pay, a cashless payment service.
Devon Energy is an independent energy company engaged primarily in the exploration, development and production of oil, natural gas and natural gas liquids. The company's operations are concentrated in various onshore areas in United States. The company's areas of operation include Delaware Basin, Eagle Ford, Powder River Basin and the STACK development, located primarily in Oklahoma's Canadian, Kingfisher and Blaine counties.
DowDuPont is a holding company comprised of The Dow Chemical Company and E. I. du Pont de Nemours and Company with a focus on forming independent, publicly traded companies in the agriculture and specialty products sectors. The company's worldwide operations are managed through global businesses and include the following reportable segments: Agriculture; Electronics and Imaging; Nutrition and Biosciences; Transportation and Advanced Polymers; and Safety and Construction.
Facebook is building and engaging products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and in-home devices. The company's products include: Facebook, which enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers; Instagram, which is a place where people can express themselves through photos, videos, and private messaging, and explore their interests in businesses, creators and communities; Messenger and WhatsApp, which are messaging applications; and Oculus, which connects people through its Oculus virtual reality products.
Intevac is a provider of vacuum deposition equipment for a variety of thin-film applications, and a provider of digital night-vision technologies and products to the defense industry. The company's business consists of two reportable segments: Thin-film Equipment, in which the company is engaged in the design and development of thin-film processing systems, where its platforms are designed for high-volume manufacturing of substrates with precise thin-film properties, such as the hard disk drive media, display cover panel, and solar photovoltaic markets it serves; and Photonics, in which the company is a developer of high-sensitivity digital sensors, cameras and systems that primarily serve the defense industry.
Marvell Technology Group is a semiconductor provider of application-specific products. The company is focused on the development of System-on-a-Chip devices, utilizing its technology portfolio of intellectual property in the areas of analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. The company develops integrated hardware platforms along with software that incorporates digital computing technologies. In storage, the company is engaged in fibre channel products and data storage controller solutions spanning cloud, enterprise, edge and personal computing markets. The company's networking products include ethernet solutions, embedded processors and WiFi connectivity solutions.
Microsoft is a technology company. The company develops and supports software, services, devices, and solutions. The company provides an array of services, including cloud-based solutions as well as solution support and consulting services. The company also delivers relevant online advertising. The company's products include operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; and video games. The company also designs, manufactures, and sells devices, including personal computers, tablets, gaming and entertainment consoles, other devices, and related accessories.
Netflix is engaged in subscription streaming entertainment service including TV series, documentaries and feature films across a variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, without commercials. Additionally, several members in the United States subscribe to the company's DVD-by-mail service. The company improves its streaming content with a focus on a programming mix of content. The company's members can download a selection of titles for offline viewing. The company operates its business as a global operating segment.
Novanta is a holding company with three segments: Photonics, which designs, manufactures and markets photonics-based solutions, including laser scanning and laser beam delivery, CO2 laser, continuous wave and ultrafast laser, and optical light engine products; Vision, which designs, produces and markets medical grade technologies, including medical insufflators, pumps and related disposables, surgical displays and operating room integration technologies, and optical data collection and machine vision technologies; and Precision Motion, which designs, produces and markets optical encoders, precision motor and motion control technology, air bearing spindles and precision machined components.
NXP Semiconductors is a holding company. Through its subsidiaries, Co. is engaged as a global semiconductor company and a long-standing supplier in the industry. Co. provides High-Performance Mixed-Signal and Standard Product solutions. Co.'s product solutions are used in automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing applications. Co. engages with original equipment manufacturers (OEM) and sell products in all major geographic regions.
RingCentral is a provider of software-as-a-service solutions. The company's product portfolio, among others, includes: RingCentral Office, which provides a unified activity for communication and collaboration across multiple modes; RingCentral Meetings, which is a collaborative meetings solution that provides web meetings, video conferencing, and screen sharing integrated with team messaging; RingCentral Professional, which is a cloud based virtual telephone service offering designed for personnel who are on the go; and RingCentral Fax, which provides online fax capabilities that allow businesses to send and receive fax documents without the need for a fax machine.
SecureWorks is a holding company. Through its subsidiaries, the company provides information security solutions focused on protecting its customers from cyber attacks. The company's integrated suite of solutions include: managed security, through which it provides its customers global visibility and insight into malicious activity enabling them to detect and remediate threats; and security and risk consulting, through which it advises its customers on a variety of security and risk-related matters. The company's proprietary Counter Threat Platform collects, aggregates, correlates and analyzes daily events from its customer base and uses algorithms to detect malicious activity and deliver security countermeasures.
ServiceNow provides enterprise cloud computing services that define, structure, manage and automate digital workflows for global enterprises. The company markets its services to enterprises in a variety of industries, including consumer products, education, financial services, government, health care, information technology (IT) services and technology. The company sells its subscription services through direct sales and, to a lesser extent, through indirect channel sales. The company also provides a portfolio of personnel and other services, both directly and through its network of partners. The company's products include IT service management, IT operations management, IT business management, and security operations.
Shopify provides a cloud-based commerce platform designed for small and medium-sized businesses. Merchants use its software to run their business across all of their sales channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops. Co. provides a platform for merchants to create an omni-channel experience that helps showcase the merchant's brand and grow its business. Co.'s platform provides merchants with a single view of their business and customers across all of their sales channels and enables them to manage products and inventory, process orders and payments, build customer relationships and leverage analytics and reporting.
Vermilion Research delivers timely, actionable, and unique research inputs to professional investors. Our research strategists highlight securities which we believe are at major inflection points, based on our various proprietary technical indicators, and offer asymmetric risk/return profiles. We believe our research methodology, which is not limited by industry sector or market capitalization, enables us to deliver superior investment recommendations.
Our process begins by organizing all actively traded stocks into coherent sectors, then into logical industry groups. We then apply our proprietary relative strength tools to identify developing price trends. Once attractive trends are identified within a selected sectors or groups, we screen for individual stocks which we believe offer the best risk/reward profile. Vermilion offers U.S. and global equity market research products. Vermilion’s research team, which has received numerous awards and accolades, has a combined 70 year of experience in the analysis of investment securities.
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