Report
Dave Nicoski ...
  • Ross LaDuke
EUR 48.04 For Business Accounts Only

Vermilion Compass: Weekly Equity Strategy

Bull Trap Still Brewing?

The S&P 500 (SPX) continues to hold below 5783, which is the upper-end of an important target/resistance area (5670-5783) we have discussed since our 8/13/24 Compass, just after the SPX hit our 5100-5191 "expected pullback zone." 5670 was the prior all-time high set in July, while 5783 is 2% above 5670. The current "breakout" above 5670 is an extraordinarily weak one, which usually suggests a false breakout/bull trap is brewing; the SPX has spent nearly three weeks above 5670, but has had zero upside follow-through. It also continues to track the 2007 SPX topping analog with great precision -- the SPX initially topped in July, pulled back 10-12%, then rallied 1-2% above its prior high set in July, only to make a top in October of 2007. Of course, there are other similarities to today, including a new Fed cutting cycle, recession indicators going off (Sahm rule and Schannep Recession Indicator), the yield curve un-inverting, and defensive Sectors outperforming. With that said, a bull trap or false breakout would only be confirmed on a break below 5670, which would trigger a sell signal. As long as the SPX does not have a weekly close above 5783 we continue to recommend reducing risk and shifting to defensives. We remain neutral on the SPX, preferring to sell near 5783 resistance and buy near 5100-5200 support until there is a break in either direction.

Negatives Outweigh Positives. The primary developments over the past week are all of the risk-off variety, and include Treasury yields and the U.S. dollar (DXY) surging higher after testing major supports (something we discussed last week), and bond market volatility (MOVE index) that has rapidly climbed to YTD highs... see charts below and page 3. Another negative dynamic is how various defensive Sectors continue to outperform, including Utilities (XLU), Real Estate (XLRE), and Telecom (IYZ), while the Consumer Discretionary Sector (XLY, RSPD) remains in long-term RS downtrends. Neutral market dynamics include: the list of indexes/Sectors that remain below resistance includes QQQ, SMH, XLK, IGV, ARKW, VXF, IJH, IJR, IWM, XRT, XBI, PSCH, KBE, and XTN (among others), and risk barometer ratios such as high beta (SPHB) vs. low volatility (SPLV) and Discretionary (XLY) vs. Staples (XLP) are neutral at best.
Positive Market Dynamics. The strongest argument for a bullish outlook is the fact that U.S. high yield spreads are near 3-year narrows. Also, a handful of indexes/Sectors are breaking to new highs (SPX, EEM, IPO, XLC, XLB, and XLI), and select defensive Sectors display mild RS deterioration, including Staples (XLP) and Health Care (XLV). These are all reasons why we would turn bullish if the SPX decisively breaks above 5783... see page 4.
In today's report we highlight attractive Groups and stocks within Services and Manufacturing: SV-13 Construction & Engineering, Large-Cap, SV-14 Construction & Engineering, Small-Cap, and MF-15 Railroad Equipment & Products... see pages 15-30.
Underlyings
AECOM

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.

ARCADIS N.V.

Argan Inc.

Argan is a holding company. The company conducts operations through its subsidiaries: Gemma Power Systems, LLC, which is an engineering, procurement and construction contractor; Atlantic Projects Company Limited, which provides turbine, boiler and rotating equipment installation, commissioning and outage services; The Roberts Company, Inc., which provides on-site services that support maintenance, shutdowns and emergency mobilizations for industrial plants in the southern region of the U.S.; and Southern Maryland Cable, Inc., which conducts business as SMC Infrastructure Solutions, and provides technology wiring and utility construction solutions to customers in the mid-Atlantic region of the U.S.

Babcock & Wilcox Enterprises

Babcock & Wilcox Enterprises is a technology-based provider of steam production from fossil and renewable sources. The company's segments are: Babcock & Wilcox, which focuses on the supply of, and aftermarket services for, steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications; Volund & Other Renewable, which provides steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries, and plant operations and maintenance services for its systems and equipment; and SPIG S.p.A. (SPIG), which provides custom-engineered cooling systems, services and aftermarket products.

BrightView Holdings

BrightView is a holding company. Through its subsidiaries, the company is a provider of commercial landscaping services. The company operates through two segments: Maintenance Services and Development Services. The company's maintenance services segment delivers a suite of recurring commercial landscaping services ranging from mowing, gardening, mulching and snow removal, to more horticulture services, such as water management, irrigation maintenance, tree care, golf course maintenance and turf maintenance. The company's development services are comprised of design, coordination and installation of landscapes at some of the corporate, athletic and university complexes.

BWX Technologies Inc.

BWX Technologies is a manufacturer of nuclear components, a developer of nuclear technologies and a service provider. The company operates three segments: Nuclear Operations Group, which engineers, designs and manufactures precision naval nuclear components, reactors and nuclear fuel for the U.S. Department of Energy/National Nuclear Security Administration's Naval Nuclear Propulsion Program; Nuclear Services Group, which provides services including nuclear materials processing and management and operating services; and Nuclear Power Group, which designs and manufactures commercial nuclear steam generators, heat exchangers, pressure vessels, reactor components and other auxiliary equipment.

Construction Partners

Construction Partners is a holding company. Through its wholly owned subsidiaries, the company provides a variety of products and services to infrastructure projects, with a focus on highways, roads, bridges, airports, and commercial and residential sites. The company's primary operations consist of manufacturing and distributing hot mix asphalt (HMA), paving activities, including the construction of roadway base layers and application of asphalt pavement, site development, including the installation of utility and drainage systems, mining aggregates, such as sand and gravel, that are used as raw materials in the production of HMA, and distributing liquid asphalt cement in connection with HMA production.

Dycom Industries Inc.

Dycom Industries is a provider of specialty contracting services. The company supplies telecommunications providers with a portfolio of specialty services, including program management; planning; engineering and design; aerial, underground, and wireless construction; maintenance; and fulfillment services for telecommunications providers. Additionally, the company provides underground facility locating services for various utilities, including telecommunications providers, and other construction and maintenance services for electric and gas utilities. The company supplies the labor, tools, and equipment necessary to provide these services to its customers.

EMCOR GROUP

EMCOR Group is an electrical and mechanical construction and facilities services firm. In addition, the company provides building services and industrial services. The company's services are provided to its customers through its operating subsidiaries and joint venture entities. The company engages in providing construction services relating to electrical and mechanical systems in various types of facilities and in providing various services relating to the operation, maintenance and management of facilities. The company also provides its construction services indirectly by acting as a subcontractor to general contractors, systems suppliers, construction managers, developers, property managers and other subcontractors.

Fluor Corporation

Fluor is a holding company. Through its subsidiaries, the company provides engineering, procurement, construction, fabrication and modularization, operations, maintenance and asset integrity, as well as project management services. The company serves a set of industries including oil and gas, chemicals and petrochemicals, mining and metals, transportation, power, life sciences and manufacturing. The company is also a service provider to the U.S. federal government and governments abroad; and it performs operations, maintenance and asset integrity activities for industrial clients. The company has four segments: Energy & Chemicals; Mining, Industrial, Infrastructure & Power; Diversified Services; and Government.

Granite Construction Incorporated

Granite Construction is a holding company, which delivers infrastructure solutions for public and private clients. The company's segments are: Transportation, which focuses on construction and rehabilitation of roads, pavement preservation, bridges, rail lines, airports and marine ports; Water, which focuses on water-related construction and water management solutions; Specialty, which focuses on construction of various complex projects including infrastructure/site development, mining, public safety, tunnel and power projects; and Materials, which focuses on production of aggregates, asphalt and construction related materials as well as proprietary sanitary and storm water rehabilitation products.

Great Lakes Dredge & Dock Corporation

Great Lakes Dredge & Dock is a provider of dredging services. The company provides dredging services in the East, West, and Gulf Coasts of the U.S. and worldwide. The company operates in one operating segment, which is also the company's sole reportable segment and reporting unit. Dredging generally involves the enhancement or preservation of navigability of waterways or the protection of shorelines through the removal or replenishment of soil, sand or rock. Domestically, the company's work generally is performed in coastal waterways and deep water ports. The U.S. dredging market consists of four primary types of work: capital, coastal protection, maintenance and rivers and lakes.

IES Holdings Inc.

IES Holdings is a holding company. The company has four business segments: Commercial & Industrial, which provides electrical and mechanical design, construction, and maintenance services to the commercial and industrial markets in various regional markets and nationwide in certain areas such as the power infrastructure market; Communications, which provides technology infrastructure services to corporations and independent businesses; Infrastructure Solutions, which provides electro-mechanical solutions for industrial operations; and Residential, which provides electrical installation services for single-family housing and multi-family apartment complexes.

JACOBS SOLUTIONS INC.

KBR Inc.

KBR provides services and technologies across the asset and program life-cycle within the government services and hydrocarbons industries. The company has three segments: Government Solutions, which provides life-cycle support solutions to defense, space, aviation and other programs and missions for military and other government agencies; Technology Solutions, which combines technologies, equipment and catalyst supply, digital solutions and associated knowledge-based services into a global business for refining, petrochemicals, inorganic and specialty chemicals; and Energy Solutions, which provides life-cycle support solutions across the upstream, midstream and downstream hydrocarbons markets.

MasTec Inc.

MasTec is an infrastructure construction company operating mainly throughout North America across a range of industries. The company's segments include: Communications, which performs engineering, construction, maintenance and customer fulfillment activities related to communications infrastructure; Oil and Gas, which performs engineering, construction and maintenance services on oil and natural gas pipelines and processing facilities; Electrical Transmission, which performs engineering, construction and maintenance of electrical transmission lines and substations; and Power Generation and Industrial, which performs installation and construction of power facilities.

Northwest Pipe Co.

Northwest Pipe is a manufacturer of engineered welded steel pipe water systems in North America. The company's solution-based products serve a range of markets including water transmission, plant piping, tunnels, and river crossings. The company manufactures Permalok? steel casing pipe, which is a pipe joining system that employs a press-fit interlocking connection system. The company added T-Lock? and Arrow-Lock? Sheet Lining Systems to its product line. T-Lock? is applied during concrete casting and permanently locks into place as a part of the substrate. Arrow-Lock? can be used in both new and rehabilitation projects.

Primoris Services Corporation

Primoris Services, through its subsidiaries, provides a range of construction, fabrication, maintenance, replacement, and engineering services to main public and private utilities, petrochemical companies, energy companies, municipalities, state departments of transportation and other customers. The company installs, replaces, repairs and rehabilitates natural gas, refined product, water and wastewater pipeline systems; large diameter gas and liquid pipeline facilities; electric utility systems; and heavy civil projects, earthwork and site development. The company also constructs mechanical facilities and other structures. Finally, the company provides process and product engineering services.

Quanta Services Inc.

Quanta Services is a provider of contracting services, delivering infrastructure solutions for the electric power, energy and communications industries in the United States, Canada, Australia, Latin America and select other international markets. The company has two segments: Electric Power Infrastructure Services, which provides network solutions to customers in the electric power industry and services that support the development of renewable energy generation; and Pipeline and Industrial Infrastructure Services, which provides infrastructure solutions to customers involved in the development, transportation, distribution, storage and processing of natural gas, oil and other products.

Sterling Construction Company Inc.

Sterling Construction is a construction company that focuses in heavy civil construction and infrastructure rehabilitation as well as residential construction projects. The company operates primarily in Arizona, California, Colorado, Hawaii, Nevada, Texas and Utah, as well as other states. The company's heavy civil construction projects include highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems, foundations for multi-family homes, commercial concrete projects and parking structures. Residential construction projects include concrete foundations for single-family homes.

TEAM INC.

Trinity Industries Inc.

Trinity Industries is a provider of railcar products and services in North America. The company has the following reportable segments: Railcar Leasing and Management Services Group, which provides operating leases for freight and tank railcars, as well as originates and manages railcar leases for third-party investors and provides fleet maintenance and management services to industrial shippers; Rail Products Group, which manufactures freight and tank railcars in North America used for transporting a variety of liquids, gases, and dry cargo, and also provides a range of maintenance services and solutions; and All Other, which includes the company's highway products business.

Tutor Perini Corporation

Tutor Perini is a construction company. The company operates in three segments: Civil, which focuses on public works construction and the replacement and reconstruction of infrastructure; Building, which provides services to various building markets for private and public works customers, including hospitality and gaming, transportation, health care, commercial offices, sports and entertainment, education, correctional facilities, biotech and pharmaceutical, among others; and Specialty Contractors, which focuses on electrical, mechanical, plumbing, heating, ventilation and air conditioning, fire protection systems and pneumatically placed concrete for civil and building construction projects.

Westinghouse Air Brake Technologies Corporation

Wabtec primarily serves the global freight rail and passenger transit industries. The company provides its products and services through two segments: Freight, which primarily manufactures and provides aftermarket parts and services for new locomotives; provides components for new and existing locomotives and freight cars; builds new commuter locomotives; and supplies rail control and infrastructure products, among others: and Transit, which primarily manufactures and services components for new and existing passenger transit vehicles, mainly regional trains, high speed trains, subway cars, light-rail vehicles and buses; and supplies rail control and infrastructure products, among others.

Willdan Group

Willdan Group is a holding company. Through its subsidiaries, the company is a provider of technical and consulting services to utilities, private industry, and public agencies of government. The company provides services in two segments: Energy, which services include surveys, program design, master planning, benchmarking analyses, design engineering, construction management, performance contracting, installation, alternative financing, and measurement and verification services; and Engineering and Consulting, which provides civil engineering-related construction management, building and safety, city engineering, city planning, geotechnical, and other engineering consulting services to the company's clients.

Provider
Vermilion Research
Vermilion Research

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.

Analysts
Dave Nicoski

Ross LaDuke

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