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Vermilion Macro Vision: Sector Synopsis

STRATEGY

In early November we discussed our expectations for a significant year-end rally. While we certainly would not expect the S&P 500, Nasdaq Composite, and Russell 2000 to continue climbing at the same rate that was experienced throughout November and December, we see little reason to be anything but bullish as long as the S&P 500 remains above major support at 4600. With that said, we see some near-term headwinds – the U.S. dollar (DXY) displays a short-term (two week) breakout above $102.75 and the 30-year Treasury yield is also reversing higher – as a result, we would not be surprised to see a pullback to 4682 or, more likely, 4600. Assuming no material damage to market dynamics, we would view a pullback to 4600 as a buying opportunity. We also want to favor quality large-caps over speculative/low-quality smaller-caps.

Aside from the S&P 500 holding above 4600 support, additional market dynamics supporting our constructive outlook include: (1) the U.S. dollar (DXY) remains below the important $105.70-$106 2+ year resistance level, (2) Treasury yields across the short-to-middle-end of the curve (1-, 2-, and 10-year) continue to move sideways to lower, with the 10-year Treasury yield below 4.1% and 4.35% resistances, (3) high yield spreads are at 20-month narrows and are below the critical 430bps level, (4) defensive Sectors including Consumer Staples (XLP) and Utilities (XLU) remain in long-term RS downtrends, and they are near 20+ year RS lows, (5) breadth remains constructive, and (6) major non-U.S. equity indexes remain largely constructive following bullish inflections in October/November 2023. These are all reasons that we remain constructive on the S&P 500 in 2024.

Near-term headwinds include: (1) the U.S. dollar (DXY) displays a short-term (two week) breakout above $102.75, (2) the 30-year Treasury yield is displays a similar upside breakout from a 1.5-2-week consolidation, (3) 1.5+ year false breakouts for the Russell 2000 (IWM), ARKK, and IPO ETFs, and (4) breadth metrics are starting to show some signs of petering-out following a historic rally from the October 2023 lows. For now, we view these as near-term concerns which lead us to believe a pullback is likely to 4682 or 4600 on the S&P 500.