Vermilion Macro Vision: Sector Synopsis
STRATEGY: Up and to the RightIn our September Macro Vision strategy, we suggested shifting towards value oriented names, which continue to outperform growth. We also believed breadth would improve followed by likely new highs and if the cyclicals could bottom it would reflect optimism that a recession has been shelved. In hindsight, there have been improvements in many of the cyclical Sectors (Manufacturing, Transportation, and Basic Materials) and a move away from defensive areas of the market (Services, Consumer Staples, and Utilities). Historically rotations such as this provide a favorable backdrop for a continuation of bull markets. As a result, we are upgrading these cyclical Sectors and downgrading the defensive Sectors which we outline in our Sector comments further below in this Strategy.
Small-caps are unfortunately having difficulty in inflecting bullishly vs. large-caps, which is something we believe needs to occur in order to provide for a more perfect scenario in having the market move to higher levels. The Fed has certainly provided enough oxygen for the markets to run a marathon, but with the backdrop of continued on again, off again trade talks, investors may feel like they are stuck in tug of war.
We would suggest that while trade negotiations are an impediment to increased economic expansion, the amount of trade in question relative to total U.S. GDP remains quite small and the U.S.'s dependence on trade with China is in actuality very small. The U.S. is one of the best positioned countries in terms of imports/exports compared to the rest of the world. We believe the Fed's rate cuts provide a measure of insurance to alleviate those concerns and, the technical action of the markets suggests that cyclical Sectors are shrugging off trade concerns and moving in a northerly direction. The Industrials, Transportation and Basic Materials Sectors are all inflecting bullishly and suggest that despite the trade war, the U.S. can still power through to new highs.
The following is a synopsis of our current investment outlook:
• U.S. Dollar: The U.S. Dollar continues to march higher after suffering a small setback. Economic numbers continue to reflect U.S. growth continues to be much better than many have thought, and certainly better than the rest of the world.
• High yield spreads: Spreads remain at elevated levels but have continues to narrow, indicating that the likelihood of a recession is diminishing.
• Defensive areas of the market are underperforming and indicate risk/reward is favorable on cyclical Sectors: We are downgrading Consumer Staples and Utilities to underweight, and the Services Sector to market weight in this strategy. We are also upgrading Industrial Manufacturing to overweight, and Basic Materials and Transportation to market weight.
• Small-caps vs Large-caps: The Russell 2000 is no longer hitting RS lows vs. the Russell 1000, but is not yet bullishly inflecting. We believe a bullish inflection would likely provide evidence that the bull market remains intact and, a further broadening of the market would be needed to re-oxygenate investors risk appetite.
• Percentage of stocks above their respective 50-day and 200-day moving average: This is another tool that we have used as a breadth indicator and distinguishes whether a rally in a given index is supported by a majority of the participants in the index. The S&P 500 currently indicates 66% of the constituents are above the 50-day, and 72% are above the 200-day moving average. The Russell 2000 has 65% above the 50-day moving average and 55% above the 200-day moving average. This indicates that the breadth of the S&P 500 remains healthy relative to the smaller caps.
• Interest Rates: Inflation remains subdued and the Feds desire to maintain growth and avert a potential recession due to the ongoing trade dispute has given rise to a third rate cut. This is highly unusual from a historical context especially when the major markets indices remain near historical highs. The uncertainty of global growth and negative interest rates should be a cause for concern and the Fed's move underscores that U.S.'s interest rates relative to the rest of the world were far too high. Interest rates appear to be coming off their lows and should be a welcome sight as investors gain confidence in the market to skirt a recession.
• Commodities: Commodities remain mired in consolidations and no clear indications of a breakdown or an upside move are reflected in their patterns. Consolidations can continue and a majority of the commodities remain neutral. We believe that a decisive breakout above or below the consolidation would either confirm or negate the possibility of an impending recession. The recent rise in rates off their lows does suggest an increasing of confidence that the rate cuts are likely to stave off a recession and similarly precious metals such as Gold and Silver are suffering setbacks as safety havens.
• Emerging markets and European markets: Emerging markets as defined by the EEM ETF is experiencing a bullish price and RS reversal vs the S&P 500. The STOXX 600 is at 4-year highs and remains above a multi-year base.
The ongoing trade war with China remains at the forefront of investor's concerns. The news surrounding phase one of the trade negotiations has been bi-polar, from the possibility of reversing current tariffs, to keeping them in place until phase two. The lines are being drawn by the bulls and bears and yet we believe the market appears poised for further upside, supported by stronger than expected U.S. economic numbers and a U.S. dollar that remains in an uptrend and reflects the global appetite for the greenback, and dollar-based investments.
Open the attached file to read our complete U.S. Strategy document, and to find links to detailed comments and recommendations for each of our 12 Sectors.
Advanced Energy Industries designs, manufactures, sells and supports power conversion products that convert power into various usable forms. The company's products enable manufacturing processes that use thin film technology for products such as semiconductor devices, flat panel displays, thin film renewables, architectural glass, optical coating and consumer products decorative and functional coating. The company also supplies thermal instrumentation products for temperature measurement and control for multiple industrial markets. The company's network of global service support centers provides repair services, conversions, improvements, and refurbishments and used equipment to companies using its products.
Advanced Micro Devices is a semiconductor company. The company primarily provides x86 microprocessors, as standalone devices or as incorporated into an accelerated processing unit, chipsets, graphics processing units (GPUs), data center and personnel GPUs, and development services; server and embedded processors, semi-custom System-on-Chip products, development services and technology for game consoles. The company also licenses portions of its intellectual property portfolio. The company's segments are: Computing and Graphics, which consists of desktop, notebooks, commercial, and chipsets products; and Enterprise, Embedded and Semi-Custom, which includes server processors, and embedded P\processors products.
Applied Materials provides manufacturing equipment, services and software to the semiconductor, display and related industries. The company's segments are: Semiconductor Systems, which develops, manufactures and sells a range of manufacturing equipment used to fabricate semiconductor chips; Applied Global Services, which provides integrated solutions to support equipment and fab performance and productivity; and Display and Adjacent Markets, which is comprised of products for manufacturing liquid crystal displays, organic light-emitting diodes and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smart phones, and other consumer-oriented devices.
CNH Industrial is a holding company. Through its subsidiaries, Co. is engaged in the design, production, marketing, sale and financing of agricultural and construction equipment, trucks, commercial vehicles, buses and specialty vehicles for firefighting, defense and other uses, as well as engines, transmissions and axles for those vehicles and engines for marine and power generation applications. Co. divides its business activities into three operating segments: Agricultural Equipment, Construction Equipment, Commercial Vehicles, Powertrain, and Financial Services.
Deere & Co. operates the following segments: Agriculture and Turf, which manufactures and distributes a line of agriculture and turf equipment and related service parts, including utility tractors, tractor loaders, combines, cotton pickers, cotton strippers, and sugarcane harvesters; Construction and Forestry, which manufactures and distributes a range of machines and service parts used in construction, earthmoving, road building, material handling and timber harvesting, including backhoe loaders and crawler dozers and loaders; and Financial Services, which finances sales and leases by the company's dealers of new and used agriculture and turf equipment and construction and forestry equipment.
Entegris is a developer, manufacturer and supplier of microcontamination control products, chemicals and materials handling solutions for manufacturing processes in the semiconductor and other industries. The company has three segments: Specialty Chemicals and Engineered Materials, which provides process chemistries, gases, and materials; Microcontamination Control, which provides solutions to filter and purify liquid chemistries and gases used in semiconductor manufacturing processes and other industries; and Advanced Materials Handling segment, which develops solutions to monitor, protect, transport, and deliver liquid chemistries, wafers and substrates.
F5 Networks is a provider of multi-cloud application services, which enable its customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. The company's application services are available as cloud-based, software-as-a-service, and software-only solutions supported for multi-cloud environments. In connection with its solutions, the company provides a range of services, including consulting, training, installation, maintenance, and other technical support services. The company's products and solutions include hardware platforms, software and software-as-a-service platforms, cloud-based managed services, and service provider solutions.
H&E Equipment Services is an equipment services company focused on heavy construction and industrial equipment. The company rents, sells and provides parts and services support for four main categories of equipment: hi-lift or aerial work platform equipment; cranes; earthmoving equipment; and industrial lift trucks. The company engages in five principal business activities in these equipment categories which include equipment rentals; new equipment sales; used equipment sales; parts sales; and repair and maintenance services. In addition to its principal business activities, the company provides ancillary equipment support activities including transportation, hauling, parts shipping and loss damage waivers.
Illinois Tool Works manufactures a range of industrial products and equipment. Automotive OEM segment produces components and fasteners for automotive-related applications. Food Equipment segment is engaged in commercial food equipment. Test and Measurement and Electronics segment produces equipment for testing and measuring of materials and structures. Welding segment produces arc welding equipment, consumables and accessories. Polymers and Fluids segment produces adhesives, sealants, lubrication and cutting fluids for auto aftermarket maintenance. Construction Products segment supplies fastening systems and solutions. Specialty Products segment is focused on patent protection.
Palo Alto Networks provides a platform that allows enterprises, service providers, and government entities to secure their organizations. The company's platform uses a traffic classification engine that identifies network traffic by application, user, and content and provides security across the network, endpoint, and cloud. The company's product, subscription, and support offerings include: firewall appliances and software; and Panorama, which is a centralized security management solution for global control of various firewall appliances and software deployed on an end-customer's network as well as in their instances in public or private cloud environments as a virtual appliance or a physical appliance.
United Technologies provides technology products and services to the building systems and aerospace industries. The company has four segments: Otis, which designs, manufactures, sells and installs passenger and freight elevators; Carrier, which provides heating, ventilating, air conditioning refrigeration, fire, security and building automation products; Pratt & Whitney, which supplies aircraft engines for the commercial, military, business jet and general aviation market; and Collins Aerospace Systems, which provides aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military, space and undersea operations.
Skyworks Solutions is a provider of analog semiconductors that connect people, places, and things, spanning a number of applications within the aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. The company's product portfolio consists of various solutions, including: amplifiers, antenna tuners, attenuators, circulators/isolators, wireless analog system on chip, direct current (DC)/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrid, light emitting diode drivers, low noise amplifiers, mixers, and modulators.
Teradyne is a global supplier of automation equipment for test and industrial applications. The company designs, develops, manufactures and sells automatic test systems used to test semiconductors, wireless products, data storage and electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. The company's automatic test equipment and industrial automation products and services include: semiconductor test systems; defense/aerospace test instrumentation and systems, storage test systems, and circuit-board test and inspection systems; industrial automation products; and wireless test systems.
Tower Semiconductor is a pure-play independent specialty foundry dedicated to the manufacturing of semiconductors. Typically, pure-play foundries do not offer products of their own, but focus on producing integrated circuits based on the design specifications of their customers. Co. manufactures semiconductors using advanced production processes for Co.'s customers primarily based on third party designs and Co.'s own proprietary designs. Co. offers the manufacture of integrated circuits with geometries ranging from 1.0 to 45-nanometers. Co. also provides design support and complementary technical services.
United Rentals is an equipment rental company that operates throughout the United States and Canada, and Europe. The company's general rentals segment includes the rental of construction, aerial and industrial equipment, general tools and light equipment, and related services and activities. This segment's customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The company's trench, power and fluid solutions segment includes the rental of construction products and related services. This segment consist of: Trench Safety region, Power and Heating, Ventilating and Air Conditioning region; and Fluid Solutions and Fluid Solutions Europe regions.
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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