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Vermilion Compass: Weekly Equity Strategy

• Financials are resolving to the upside -- a win for the market. The Financial Sector's bullish inflection bodes well for the market. As we wrote over the past two weeks, the (then) potential top pattern visible in the XLF would resolve in one of two ways: (1) a breakdown below $23, resulting in a market-wide correction; or (2), a breakout above $24, producing a resumption of the prior advance. Closing yesterday at $24.47, XLF went the latter route.

On Tech: Extended? Yes. Ripe for a pullback? Sure. But two—2!—down days, despite their magnitude, do not alter the Sector's long-term trends (see page 4). Further backing and filling is certainly possible, but we are staying overweight until its relative strength trend either (1) violates support—nowhere close to doing so—or (2) forms a top pattern—also nowhere close to doing so.

Though we do not like to see such hard selling in leadership names, it's encouraging that other sectors and groups soaked up the supply. In other words, the selling was contained to tech/growth, resulting in rotation within the equity market, not an exit from it.

After all, observing individual charts in other Sectors like Manufacturing, Materials, and Health Care, one would not be aware of the wholesale selling in Tech, nor question the market's intact uptrend. Take a look at names like NOC or CAT, EMN or CENX, ABT or CNC. All shrugged, and stuck to their advances. Our bullish outlook remains intact.

• Small and mid-caps are breaking out. Add the Russell 2000 and S&P 400 indices to the list of new highs. Both are breaking out from multi-month base patterns. Relative to large caps, however, neither has yet to reverse their YTD downtrends (though mid caps are close).

• Health Care is breaking out. The XLV ETF is breaking out from two-year base. Med device stocks--BSX, SYK, ISRG, etc.--are driving this trend. Watch biotechs: XBI (ETF) is poised for a breakout from a multi-month base ... see page 3

• Watching for an Energy reversal. We remain underweight--as warranted by multi-year relative strength lows--but we're watching the XLE closely. The ETF is rebounding towards a potential reversal of its 7-month price decline... see page 4

• Theme of the Week: Asset Managers, Electronic Exchanges, and Property & Casualty Insurers... see pages 8-22

• Charts highlighted: ALL, AMP, APO, BEN, BLK, BRK.B, BX, CB, CBOE, CINF, CME, EV, FNF, IBKR, ICE, INFO, IVZ, LM, MKTX, NDAQ, NTRS, PGR, SEIC, STT, TRV, XBI, XLF, XLK, XLV

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