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Vermilion Compass: Weekly Equity Strategy

THEMES:

• The Big Picture Remains Bullish: In a risk-on environment—which we are in— we'd expect certain chart-specific boxes to be checked. Chief among these would include: major indices trending higher above their 200-day MAs—check; small caps leading—check; cyclical sectors outperforming—check; defensive sectors underperforming—check; and financial stocks participating—check plus. The only major concern we have is the rate of advance in interest rates. A breakout above 2.5% in the 10-year Treasury yield would mark a reversal of the 9-year declining trendine (see next page).

• Financials Top our Rankings: The Sector can be broken down quickly: banks are leadership, but extended (wait for pullbacks); insurers are breaking out/bullishly inflecting (buy selectively); electronic exchanges are pulling back to support (buy); REITs are correcting (avoid); and, the most timely opportunity, asset managers are bottoming (buy)... see pgs 2-5

• Energy is Bottoming: Our overweight recommendation dating back to April remains intact, as we continue to watch cyclical bottom patterns unfold. This is still a timely theme, too. Names like BP, COP, DVN, and MUR are just beginning to bullishly inflect. Almost as telling, the Sector refuses to acknowledge the dollar's advance. Incongruent, yes, but for now we view this as a sign of strength (for energy stocks) and recommend staying the course until technicals say otherwise. The second-half of today's report is devoted to bottom-up energy ideas... see pages 5, 11-21

• Materials: Steel and metals miners continue to lead. Copper miners, which we highlighted in our 11/8 Insights report, are swiftly inflecting; FCX is breaking out from a cyclical bottom. Looking at laggard Groups, fertilizer stocks are bottoming: AGU, CF, MOS, and POT. Buy... see pages 6-7

• Tech Holds Steady as a Long-Term Leader: New 14-year relative strength highs? That's something we want to own. That's also the current state of our Tech Sector, where names like AAPL are rebounding off their 200-day MAs. Internally, semis are inflecting higher following a brief corrective phase, and many are trading above secular bases such as ADI, XLNX, and SWKS.

• Consumer Continues to Gradually Improve: We bumped Consumer Discretionary up to market weight last week, as weekly bottom-up reviews of the market reveal an improving technical outlook. The Sector contains a variety of set-ups, ranging from bottom-fishers like RL and WYN to pullback opportunities like AMZN and NFLX.


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