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Vermilion Compass: Weekly Equity Strategy

THEMES:

Bullish big picture, but keep an eye on financials. The market is tossing out plenty of technical banana peels. Though the weight of the evidence still remains long-term bullish, signs of near-term deterioration are evident. To be sure, most areas look great--aero/defense, aluminum, casinos, FANG, hotels, med devices, rails, solar, the Tech Sector, all international markets. However, weakness is still on display in small-caps, biotechs, and financials. This has created a mixed message over the past several months.

Concerning financials, where short-term weakness is pronounced, we view the Sector as working through a mid-cycle correction. As we highlighted last week, the XLF ETF still exhibits a potential, 6-month top pattern, which, if the 200-day and $23 support level are broken, would usher in a larger correction, likely resulting in a test of the 2015 highs (near $20). XLF holdings send a mixed message as well, with names like BBT and JPM having already violated short-term support, while others like BK and C churn sideways.

But as we scan through the charts of our Financial Groups, long-term uptrends remain intact, and are still far from reversing. Also, most Groups--including the XLF--are still trading above their 200-day moving averages. Additionally, foreign banks and many insurers are attractive. These are positives. And we expect the current correction, whether it ends this week or in a couple of months, to produce attractive pullback opportunities. What will generate a buy signal? Widespread breakouts above short-term downtrends. This would likely be accompanied by an interest rate rebound. We are watching closely.

To summarize, the market's big picture remains bullish, but the short-term outlook is opaque. Financials hold the key to the market's next move: does the XLF hold above support or not? That will be the tell. In the meantime, we give the benefit of the doubt to the intact uptrend.

Theme of the Week: Data Processing & Outsourcing Groups. Within our Services Sector, Data Processing & Outsourcing Service Groups--small, mid, and large-cap--are leadership. V and MA continue to extended higher, while breakouts are visible in names like FDC and TSS.. see pages 7-18

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