Report
Dave Nicoski ...
  • Ross LaDuke
EUR 44.96 For Business Accounts Only

Vermilion Compass: Weekly Equity Strategy

Recessionary Signals as SPX Tests Resistance; Downgrading Energy to Underweight

Our long-term outlook remains neutral on the S&P 500 (SPX) as of our 8/6/24 Compass, after being bullish since early-November 2023. Despite our expectations for a short-term rally since our 8/13/24 Compass, we still see the SPX and Nasdaq 100 (QQQ) as going through a 1- to 4-month pullback/consolidation period, and market dynamics remain concerning. Current price action on the SPX is extremely similar to prior major topping patterns that occurred in April 2000 and August 2007. It is important to note that we are not blindly comparing today's market with 2000 and 2007; similarities to today's market include (1) the Fed was getting ready to cut rates, (2) recession indicators such as the Sahm rule and Schannep Recession Indicator (SRI) were triggered in early-2001 and early-2008 (same as now), and (3) the yield curve was un-inverting (same as now). Sahm rule and SRI triggers, the Fed starting a potentially aggressive rate cutting cycle, continued outperformance from defensive Sectors, toppy price action in this bull market's leaders (NVDA, SMH), and now a major breakdown below $71 on WTI crude oil (recessionary signal) remain our top concerns. As initially discussed last week (8/27/24 Compass), we viewed the SPX rally into YTD highs and resistance in the 5670-5783 range as an ideal time to reduce risk and shift to defensives; if a major top is happening, that is where it would start from (using the 2000 and 2007 tops as comparisons).

Market Dynamics are Mixed, Lean Bearish. As for concerns, defensive Sectors (Utilities, Staples, Health Care, and Real Estate) are outperforming relative to the SPX since July by more than any other time in over two years, WTI crude oil displays a major breakdown below $71 (a recessionary signal), most indexes are below resistance (SPX, QQQ, SMH, IJH, IJR, IWM, XRT, XBI, and EEM), bond market volatility (MOVE index) remains elevated, and seemingly-reliable recession indicators are going off (Sahm rule and SRI; despite their historical 90%+ reliability for predicting recessions since the 1940s, there is always the possibility for false signals due to some combination of small sample size and overfitting data). On the other hand, we have Financials (XLF), Industrials (XLI), Materials (XLB), the Dow, and equal-weighted S&P 500 (RSP) breaking out to new all-time highs, high yield spreads signaling everything is fine, and healthy breadth. One of the most bearish things that can happen at this point is if the XLF, XLI, XLB, RSP, and Dow end up being false breakouts, something that appears to be happening already with the Dow and XLB... see charts below and pages 2-5.
Underlyings
Alliant Energy Corp

Alliant Energy is a public utility holding company, engaged in providing regulated electric and natural gas service. The company's subsidiaries are: Interstate Power and Light Company, which is engaged principally in the generation and distribution of electricity and the distribution and transportation of natural gas to retail customers in select markets in Iowa; Wisconsin Power and Light Company, which is engaged principally in the generation and distribution of electricity and the distribution and transportation of natural gas to retail customers in select markets in Wisconsin; and Alliant Energy Finance, LLC, which manages a portfolio of wholly-owned subsidiaries and additional holdings.

Atmos Energy Corporation

Atmos Energy is engaged in the regulated natural gas distribution and pipeline and storage businesses. The company delivers natural gas through regulated sales and transportation arrangements to residential, commercial, public-authority and industrial customers. The company's segments are: Distribution, which is comprised of its regulated natural gas distribution and related sales operations; and Pipeline and Storage, which consists of the pipeline and storage operations of its Atmos Pipeline-Texas Division (APT) and its natural gas transmission operations in Louisiana. APT has intrastate pipeline operations in Texas with a focus on the natural gas-producing areas of central, northern and eastern Texas.

Chesapeake Utilities Corporation

Chesapeake Utilities is an energy company engaged in regulated and unregulated energy businesses. The company operates within two segments: Regulated Energy and Unregulated Energy. The company's regulated energy businesses consist of: regulated natural gas distribution operations; regulated natural gas transmission operations; and regulated electric distribution operations. The company's unregulated energy segment includes a propane operations; its natural gas marketing operation providing natural gas supply; its unregulated natural gas transmission/supply operation; its Combined Heat and Power Plant that generates electricity and steam; and its subsidiary that provides mobile compressed natural gas utility.

CMS Energy Corporation

CMS Energy is a holding company. The company has several subsidiaries, including: Consumers Energy Company, an electric and gas utility that serves individuals and businesses operating in the alternative energy, automotive, chemical, food, and metal products industries, as well as a group of other industries; CMS Enterprises Company, through its subsidiaries and equity investments, is engaged in domestic independent power production, including the development and operation of renewable generation, and the marketing of independent power production; and EnerBank USA, an industrial bank located in Utah that provides unsecured consumer installment loans, primarily for financing home improvements.

Deutsche Telekom AG

Deutsche Telekom is engaged in the telecommunications services and information technology sectors. Co. operates as an integrated telecommunications provider. It is organized into four operating segments: Germany, Europe, and the United States; and Systems Solutions, as well as Group Headquarters and Shared Services. Co. provides fixed-network lines, broadband lines and mobile communications. Co. also provides customized Information and Communication Technology (ICT) solutions for corporate customers under the T-Systems brand. The Group Headquarters and Shared Services segment comprises cross-segment management functions, real estate services, and mobility solutions, among others.

Dominion Energy Inc

Dominion Energy is a holding company. Through its subsidiaries , the company is engaged in producing and transporting energy. The company's operations are conducted through its subsidiaries: Virginia Electric and Power Company, which is a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and North Carolina; and Dominion Energy Gas Holdings, LLC, which serves as the intermediate parent company for the company's Federal Energy Regulatory Commission-regulated interstate natural gas transmission pipeline and underground storage systems in the eastern and Rocky Mountain regions, as well as for the liquefied natural gas import/export and storage facility.

Duke Energy Corporation

Duke Energy is a holding company. Through its subsidiaries, the company operates as an energy company. The company's segments include: Electric Utilities and Infrastructure, which provides retail electric service through the generation, transmission, distribution and sale of electricity to customers within the Southeast and Midwest regions of the United States; Gas Utilities and Infrastructure, which conducts natural gas operations, as well as owns, operates and has investments in various pipeline transmission and natural gas storage facilities; and Commercial Renewables, which acquires, develops, builds, operates and owns wind and solar renewable generation throughout the continental United States.

Entergy Corporation

Entergy is a holding company. Through its subsidiaries, the company is an integrated energy company engaged mainly in electric power production and retail distribution operations. The company owns and operates power plants. The company has two segments: Utility, which generates, transmits, distributes and sells electric power to retail and wholesale customers in Arkansas, Louisiana, Mississippi, and Texas; and Entergy Wholesale Commodities, which includes the ownership, operation, and decommissioning of nuclear power plants, located in the northern United States, the sale of the electric power produced by its operating plants to wholesale customers, and also provides services to other nuclear power plant owners.

Eversource Energy

Eversource Energy is a public utility holding company. Through its subsidiaries, the company has four segments: electric distribution, which is engaged in the distribution of electricity to retail customers in Connecticut, Massachusetts and New Hampshire; electric transmission, which owns and maintains transmission facilities that are part of an interstate power transmission grid over which electricity is transmitted throughout New England; natural gas distribution, which distributes natural gas to communities in Massachusetts and cities and towns in Connecticut; and water distribution, which provides water services in towns and cities in Connecticut, Massachusetts and New Hampshire.

Exelon Corporation

Exelon is a utility services holding company engaged in the generation, delivery and marketing of energy through Exelon Generation Company, LLC and the energy distribution and transmission businesses through Commonwealth Edison Company, PECO Energy Company, Baltimore Gas and Electric Company, Potomac Electric Power Company, Delmarva Power & Light Company and Atlantic City Electric Company. Through its business services subsidiary Exelon Business Services Company, LLC, the company provides its subsidiaries with a variety of support services.

Fortis Inc.

Fortis is principally an international electric and gas utility holding company. Co. also holds investments in non-regulated generation assets. Co.'s business segments are: Regulated Electric & Gas Utilities - United States; Regulated Gas Utility - Canadian; Regulated Electric Utilities - Canadian; Regulated Electric Utilities - Caribbean; Non-Regulated - Fortis Generation; Non-regulated - Non-Utility; and Corporate and Other. Its regulated utilities served more than 3.0 million customers across Canada and in New York State and the Caribbean. Co. also holds investments in non-regulated generation assets in Canada and Belize, through Fortis Generation.

National Fuel Gas Company

National Fuel Gas is a holding company. Through its subsidiaries, the company is engaged principally in the production, gathering, transportation, distribution and marketing of natural gas. The company's segments are: Exploration and Production, which is engaged in the exploration for, and the development and production of, natural gas and oil reserves in California and in the Appalachian region; Pipeline and Storage, which provides interstate natural gas transportation and storage services, as well as transports and stores natural gas; Gathering, which builds, owns and operates natural gas processing and pipeline gathering facilities; and Utility, which provides natural gas utility services.

NextEra Energy Inc.

NextEra Energy is a holding company, engaged in electric power and energy infrastructure. The company has two principal businesses, Florida Power & Light Company (FPL) and NextEra Energy Resources, LLC (NEER). FPL is a rate-regulated electric utility engaged primarily in the generation, transmission, distribution and sale of electric energy in Florida. FPL provides service to its electric customers through a transmission and distribution system that links its generation facilities to its customers. NEER, through its subsidiaries, owns, develops, constructs, manages and operates electric generation facilities in wholesale energy markets primarily in the United States and Canada.

NiSource Inc

NiSource is an energy holding company. Through its subsidiaries, the company is a natural gas distribution company. The company's reportable segments are: Gas Distribution Operations and Electric Operations. For its gas distribution operations, through its wholly-owned subsidiary, NiSource Gas Distribution Group, Inc., the company owns distribution subsidiaries that provide natural gas to residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky, Maryland and Massachusetts. Through its electric operations, the company generates, transmits and distributes electricity through its subsidiary, Northern Indiana Public Service Company LLC, and engages in wholesale and transmission transactions.

OGE Energy Corp.

OGE Energy is a holding company. Through its subsidiaries, the company is an energy and energy services provider providing physical delivery and related services for both electricity and natural gas primarily in the south central United States Co. conducts these activities through two business segments: electric utility, which generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas; and natural gas midstream operations, which consist of the company's investment in Enable Midstream Partners, LP, which is primarily engaged in the business of gathering, processing, transporting and storing natural gas.

PPL Corporation

PPL is a utility holding company. Through its regulated utility subsidiaries, the company delivers electricity to customers in United Kingdom, Pennsylvania, Kentucky, and Virginia; delivers natural gas to customers in Kentucky; and generates electricity from power plants in Kentucky. The company's segments are: United Kingdom Regulated, which has regulated electricity distribution operations in United Kingdom; Kentucky Regulated, which is engaged in the regulated generation, transmission, distribution and sale of electricity in Kentucky and Virginia, and the distribution and sale of natural gas in Kentucky; and Pennsylvania Regulated, which delivers electricity in eastern and central Pennsylvania.

Public Service Enterprise Group Inc

Public Service Enterprise Group, through its subsidiaries, is engaged in the energy industry. The company conducts its business through two subsidiaries, Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (PSEG Power). PSE&G is a public utility, which is engaged in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey; and PSEG Power is a multi-regional energy supply company that integrates the operations of its merchant nuclear and fossil generating assets with its power marketing businesses and fuel supply functions through energy sales in energy markets primarily in the Northeast and Mid-Atlantic United States.

Sempra Energy

Sempra Energy is an energy-services holding company. The company's segments are: San Diego Gas & Electric Company, which provides electric services and natural gas services in Southern California; Southern California Gas Company, which owns and operates a natural gas distribution, transmission and storage system that supplies natural gas in Southern California and portions of central California; Sempra Texas Utilities, which includes Oncor Electric Delivery Company LLC that provides electricity to consumers; Sempra Mexico, which develops, owns and operates, or holds interests in, energy infrastructure in Mexico; and Sempra LNG, which develops projects for the export of liquefied natural gas.

Unitil Corp.

UNITIL is a public utility holding company. Through its subsidiaries, the company distributes electricity and natural gas to customers in New Hampshire, Massachusetts and Maine. The company's natural gas operations include gas distribution utility operations, which are conducted through two of its operating utilities, Northern Utilities, Inc. (Northern Utilities) and Fitchburg Gas and Electric Light Company; and interstate gas transmission pipeline operations, in which its Granite State Gas Transmission, Inc. subsidiary provides Northern Utilities with interconnection to primary natural gas pipelines and access to domestic natural gas supplies in the south and Canadian natural gas supplies in the north.

WEC Energy Group Inc

WEC Energy Group is a holding company. Through its subsidiaries, the company provides regulated natural gas and electricity, and nonregulated renewable energy. The company's segments include: Wisconsin, which generates and distributes electric energy and provides retail natural gas distribution service; Illinois, which includes the natural gas utility operations; Electric Transmission, which owns, maintains, monitors, and operates electric transmission systems in Wisconsin, Michigan, Illinois, and Minnesota; and Non-Utility Energy Infrastructure, which owns and leases generating facilities to its Wisconsin Electric Power Company subsidiary and owns underground natural gas storage facilities in Michigan.

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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