Vermilion Compass: Weekly Equity Strategy
Attractive Sector Trends, Mixed BreadthSector and Group trends--our bread and butter--still endorse a bullish outlook. With a few exceptions, cyclicals continue to top our relative strength rankings, and defensive sectors like Consumer Staples continue to lag -- a pairing that supports a risk-on environment.
A survey of our latest relative strength rankings (“RSRâ€) shows Manufacturing in the lead. This Sector, as we highlighted last week, just broke out to all-time price and relative strength highs. A win for the risk-on trade. This is followed by other cyclicals, including Transports, Health Care, Materials, and Technology.
Closer to the bottom of our rankings, Consumer Discretionary and Energy are the exceptions to the cyclical-leadership argument. That said, and while neither is an overweight, both Sectors exhibit stabilization and bullish trend reversals. We're watching energy closely as both Brent and WTI attempt to emerge from multi-year bottom patterns (see page 3).
While Sector and Group trends are largely constructive, breadth is the one red flag. For instance, the percent of the Russell 3000's stocks trading above their 200-day moving average is not confirming the index's new price highs. Thus, a negative divergence is present. This is not an actionable development in and of itself; divergences can develop well in advance of a market correction. Case in point: this indicator negatively diverged from the index for 21 months prior to the mid-2015 correction. However, it is something to monitor, and we'll take our actionable cues from future breakdowns in leading Sectors and Groups.
In this week's report we focus on actionable ideas in the following Groups:
• Trucks & Components (MF-14). CMI, PCAR, OSK, ALSN, NAV, RUSHA... pages 7-10
• Construction Equipment (MF-16). CAT, TEX, MTW, ALG, HY, CMCO... pages 11-14
• Lrg-Cap Semis (TE-01). TSM, INTC, NVDA, TXN, MU, ADI, IFNNY, MCHP... page 15-18
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Alamo Group is engaged in the design and manufacture of agricultural equipment and infrastructure maintenance equipment for governmental and industrial use. The company's products include tractor-mounted mowing and other vegetation maintenance equipment, street sweepers, excavators, vacuum trucks, snow removal equipment, pothole patchers, zero turn radius mowers, agricultural implements and related aftermarket parts. The company sells its products primarily through a network of independent dealers and distributors to governmental end-users, related independent contractors, as well as to the agricultural and commercial turf markets. The company has three reportable segments: Industrial, Agricultural and European.
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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