Vermilion Compass: Weekly Equity Strategy
The market's bullish trajectory remains unchanged. Yet beneath the surface, it's anything but stasis; rotation is visible – and quick. From the beginning of June to now, we can classify this Sector rotation into three acts.Act One: sellers punish growth, especially extended Tech stocks. This seems to have passed, with FANG, semis, and the broad Tech Sector still trading above their price and relative strength uptrends. Tech remains and overweight even though better opportunities exist elsewhere.
Act Two: Health Care becomes the market darling. Two weeks ago, the Sector leapt to the top of our rankings, bypassing Tech, prompting us to upgrade it to overweight. The outlook remains attractive. Take advantage of recent weakness.
Act Three: Rising interest rates prompt an exodus from defensive/dividend-paying Sectors and Groups. This is visible in Utilities (XLU) and Consumer Staples (XLP), both which exhibit failed breakouts from base patterns. And in the case of Staples, its relative strength trend is descending to five-year lows (see next page). We remain underweight both.
Going forward, our optimistic outlook remains intact, informed by top-down and bottom-up observations, both here and abroad, including:
• Semis are rebounding off support. The SOX Index is rebounding off the 17-month uptrend.
• Biotechs are breaking out. Most names, including the IBB and XBI ETFs, exhibit post-breakout pullback opportunities. Even GILD is showing early signs of a bottom.
• Asset managers are bullishly inflecting. BLK is leading the turnaround, followed by names like AB, AMG, AMP, BX, CG, EV, IVZ, LM, TROW, etc.
• Homebuilders are advancing to multi-year highs. Impressive in light of rebounding interest rates.
• Solar stocks are bottoming. This is visible in the Guggenheim Solar ETF, TAN, and individual names such as FSLR, CSIQ, and SPWR.
• Even fertilizers are stabilizing. The lagging Group is working through a short-term bottom, as names like AGU, CF, ICL, IPI, MOS, and POT are responding to corn and wheat's breakouts to 12-month highs.
• Aero/Defense continues to outperform. Our Manufacturing Sector is trading just below all-time relative strength highs. Internally, Aero/Defense remains a pocket of strength. We highlight actionable names in today's report.
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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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