Vermilion Compass: Weekly Equity Strategy
Mixed signals: weakness in financials, strength in biotechsOur message from last week remains intact: the long-term outlook remains bullish, but short-term signals are muddled. And a tandem of hurricanes, combined with a missile-exhibitionist at the helm of North Korea, are compounding market uncertainty.
The Financial Sector is bearing the brunt of this, particularly banks and insurers, where bearish inflections are widespread. Declining rates aren't helping either. While the Sector is far from hitting a 52-week price low, its relative strength is deteriorating, and for this reason we are downgrading Financials to market weight. Better charts are visible in Health Care, Manufacturing, and Tech -- our remaining overweights.
Weakness in Financials is clearly not a welcomed sign for those with bullish outlooks (like us). But there's still plenty to like, technically, about this market. To the question of where are the signs of risk-on visible? we reply with the following, robust list: (1) Tech continues to lead, its price and RS trends touching all-time highs last week; (2) emerging markets are outperforming, with the MSCI EM Index advancing to 2-year highs versus the S&P 500; (3) biotechs like BIIB are breaking out, leading a turnaround in Health Care, one of our favorite Sectors; (4) casino stocks are bullishly inflecting, including LVS, WYNN, MLCO, and PENN; (5) autos are recovering, visible in charts like GM and FCAU (even TM is stabilizing); (6) FANG continues to trade above its 200-day MA; (7) global miners including VALE and RIO are breaking out; (8) sporadic, short-term bottoms in select retailers; and (9) despite recent strength in Utilities, Consumer Staples, another defensive Sector, continues to lag, only ranking ahead of Energy.
Key themes:
• Downgrading Financials. Given the Sector's relative deterioration, we are downgrading Financials to market weight. Pockets of strength still exist (e.g. exchanges), but breadth is problematic... see page 3
• Gold miners are bullishly inflecting. A Group we recommended last week, gold miners continue to bullishly inflect. This is a buying opportunity... see pages 3, 8-14
• Buy biotechs, overweight Health Care. In today's report we highlight actionable charts throughout Health Care, our top-ranked Sector, emphasizing widespread opportunities within biotechs ... see pages 3, 15-19
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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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