Vermilion Compass: Weekly Equity Strategy
Cyclicals continue to lead; Energy is bottomingRotation is alive and well. Once-dormant Sectors and Groups are helping propel the market to new highs. While Tech, the overachiever, continues to lead, we're finally seeing the Energy Sector contribute. And other economically sensitive Groups, like Casinos and Engineering & Construction, are bullishly inflecting, confirming the risk-on message. Combined, this is (1) a positive sign for the market, and (2) actionable.
Energy has been a feature of our Compass reports—domestic and int'l—for the past two months. In them, we cited crude's breakout from a multi-year bottom as a signal for energy stocks to kick off a catch-up rally. Yesterday we received confirmation: XLE broke out.
Within the Sector, E&P stocks are particularly attractive. Here, the E&P/Energy Sector ratio (XOP/XLE) is breaking out from a multi-month head & shoulders bottom, a pattern prevalent in many individual names like CPE, CRR, CRZO, GPOR, HAL, HES, MUR, NBL, PDCE, RSPP, WTI, XOG, etc. Add exposure.
This rotation has a cost — other Groups and Sectors have to pay, at least from a relative perspective. Right now, defensive segments are that source of funds, Consumer Staples especially. Recently, however, a leader for most of the year, Health Care just joined this crowd. While HMOs and device stocks continue to outperform, pharma and large-cap biotech have begun to lag, causing the Sector's relative strength trend to roll over. Accordingly, we are downgrading Health Care to market weight.
In today's report we highlight ideas within the following Groups: Engineering & Construction, Semiconductors, and Auto Dealers.... pages 6-21
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AECOM designs, builds, finances and operates infrastructure assets for governments, businesses and organizations. The company provides: planning, consulting, architectural and engineering design services to commercial and government clients in transportation, facilities, environmental, energy, water and government markets; construction services, including building construction and energy, infrastructure and industrial construction; as well as program and facilities management and maintenance, training, logistics, consulting, technical assistance, and systems integration and information technology services, for agencies of the United States government and for other national governments.
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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