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Vermilion Macro Vision: Sector Synopsis

Our last strategy “Fake Moves” highlighted our view that the markets were showing no parallel to the “fake news” narrative and indeed provided a significant backdrop for a continued move higher. Breadth continues to support the move to new highs in the market and, in the case of Sector orientation, growth continues to indicate leadership. Highlighted below are a number of market characteristics supporting our continued bullish outlook.

• Healthy Internals: The Russell 3000 continues to march in an upward trajectory and is supported by healthy internals, and the advance/decline line is at all-time highs.

• Cyclicals are mixed: Manufacturing, Technology, select Transports, casinos, hotels and motels continue to demonstrate leadership.

• Defensive areas of the market continue to lose favor: Utilities and Consumer Staples continue to reflect underperformance and are suggestive of market participant's disdain for safety.

• Healthcare has moved into a leadership position: Growth areas such as Biotech continue to show resilience and has broken above a significant resistance level.

• Small vs. large caps: Once again small caps are not showing significant deterioration vs large caps, but the breadth of small caps, as indicated by the Russell 2000, is near a new high and suggests the internals are healthy.

• Technicals remain constructive overseas: Japan continues to march higher and is near multi-year highs. Even more importantly their market has been building a base for over the last 30 years, and a move above the all-important level of 1800 would suggest a secular move much higher. Emerging markets continue to outperform the U.S. and their performance is indicative of the continuation of the re-coupling we have indicated
is taking place across markets.

• Interest rates: Despite a likely unwinding of bonds by the Fed, yields have declined over the last 9 months and are still range bound. However, the most recent back up in rates has created a possible bullish flag pattern on the TNX chart. Keep in mind that a rally above the 2.4% level on the 10-year would be bullish for rates and confirm this pattern - - something to watch.

• US Dollar: The greenback has declined through a major support level and suggests that growth in the emerging markets is much greater than that in the U.S. Once again confirmation that the recoupling of the global economies is proceeding.

In the attached September Strategy document we highlight the following sectors:

• Energy: Market Weight. We are upgrading this Sector to a market weight as many stocks are experiencing positive inflections; however we do not yet believe this is a long-term RS performance leader.

• Health Care: Overweight. We upgraded this sector to an overweight on 06/27 as biotechs staged a price and RS reversal and broke above a significant resistance level.

• Technology: Overweight. Tech continues to demonstrate its long-term leadership status. Major bases on the long-term charts reflects years of consolidations and enormous upside potential.

• Manufacturing: Overweight. A bulk of the strength in this sector is relegated to the aerospace industry, but we are increasingly observing some strength in the automobile suppliers and the construction related stocks.

Open the attachment to find our complete U.S. equity strategy document, as well as links to our respective sector commentaries.

For a trial to Vermilion Technical Research call (952) 922-7500, or visit our website at: www.vermilioncap.com