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Vermilion Compass: Weekly Equity Strategy

Jitters in growth, rebounds in value

Short-term rotation is underway. Yesterday's salvo of tech sell-offs and energy rallies is emblematic of a developing, albeit young trend: a shift from expensive and extended to cheap and ugly, from growth to value--at least from a tactical perspective.

FANG stocks and parts of Tech, both long-term leaders, have become a short-term source of funds. It's important to note that while they do appear ripe for further consolidation, their long-term uptrends have not been broken; they're still intact. For instance, semi ETFs like SMH continue to trade above support, and names like INTC and XLNX are, so far, immune from selling. That said, the charts of other names like QRVO, SWKS, and ADBE are bearishly inflecting, putting their advances on hold.

Fortunately, this weakness is confined, resulting in sector and group rotation, not widespread selling. There is still plenty to like about this market, including areas we have shied away from for most of the year, such as energy and retailers. In the case of energy, widespread trend reversals are visible, ranging from XLE to individual stocks like CVX, OXY, and PBR. Given these improvements, along with WTI's advance to multi-month highs, we upgraded the Sector in our September Macro Vision to market weight. Retailers (XRT), another group we touch on in this report, show signs of a bottoming process. Internally, this bottoming process in brick-and-mortars is unfolding as AMZN reveals signs of an intermediate-term top... see pages 3-4, 8-19
Other bullish signs:

• Manufacturing is strengthening. Our second-longest overweight, our Manufacturing Sector is breaking out to all-time relative strength highs.

• Engineering & Construction stocks are bullishly inflecting. A long-term laggard, this Group is beginning to yield a number of bullish inflections, such as JEC, PWR, and ACM.

• Biotechs exhibit pullback opportunities. One portion of growth that is holding up well, biotechs (IBB) reveal a multi-week pullback to support--a buying opportunity and a confirmation of the risk-on environment.

• Transports continue to rally. Rails and truckers are advancing to 12+ month highs.

• Autos are improving. GM is breaking out and F shows signs of a bottom. Confirming trends are visible in Japanese ADRs like TM and HMC, two names we recommended in our 9/11 Int'l Insights report.

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