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Vermilion Compass: Gold miners bottoming; upgrdg Energy to mkt weight

​Highlighted Themes:

Market Overview... see pages 1-4

Sector Commentary: Upgrading Energy to market weight. Cyclical Sectors continue to slowly improve, a trend that started with Cons. Discretionary & Manufacturing; .. see pages 5-7

Actionable Groups & Constituents: Accumulate gold/silver miners and E&P stocks... see pages 8-17

Market Observations

Technical trends and indicators – top down, bottom up, and macro – continue to migrate to the “risk-on” side of the ledger. A quick sampler: (1) the major indices are recovering from failed tops; (2) cyclical sectors are beginning to exhibit strength, a trend that started in Consumer Discretionary and Manufacturing; (3) select internal indicators are advancing to multi-year highs (e.g., the percent of NYSE stocks above their 50-day MA); (4) the equal-weighted S&P 500/cap-weighted S&P 500 ratio is bullishly inflecting; (5) even individual stocks, ranging from bottoms in FLR to WYNN, are indicative of an improving market.

This is not to say that we do not have any reservations. Three stubborn trends have yet to confirm the risk-on signs seen elsewhere: (1) small caps continue to lag, with the Russell 2000/S&P 500 ratio still stuck in a downtrend; (2) an abundance of financial stocks have yet to overtake established resistance levels (especially investment banks/brokers and asset managers); and (3) defensive Sectors have to satisfactorily reverse their relative strength uptrends.

In the case of the latter — uncooperative defensive sectors — we are beginning to see short-term improvements. Looking at the XLU and XLP ETFs, both established new price highs last week, but relative strength trends did not confirm, instead treading sideways. This is a positive sign. And if these RS trends transition from sideways to down, the risk-on argument only strengthens.

Energy and Precious Metals… The latest trends to endorse the risk-on message are the breakouts in Precious Metals Miners and stabilization throughout the Energy Sector. This is the focus of today’s report, and a timely one, we believe, given an emerging macro tailwind: a topping pattern in the U.S. Dollar Index.

Our Precious Metals Groups are reversing multi-year downtrends. This is a trend we have highlighted since our Feb. 9 Compass, and one that is quickly transitioning from a bottoming process to renewed uptrends. Glance at any individual chart – from AEM to SA to FNV – and the past week’s trading action depicts decisive breakouts from bottom patterns. This is a global theme. Take advantage of pullbacks.

While Energy doesn’t boast patterns as developed as the gold miners, we are seeing an uptick in the number of stocks trading above their 200-day MA. And a growing number of stocks, primarily E&P names, are establishing bottoming patterns, including HAL, SLB, EOG, PTEN, NBR, HP, FANG, and PDCE. We do not expect the Energy Sector to lead anytime soon, but this stabilization is a welcomed sign, an improvement to market breadth, warranting an upgrade to market weight.

Lastly, Canada’s TSX Composite supports the improvements mentioned above. With a 30% weighting in energy and materials, the index exhibits a near-term bottom, with the current rebound overtaking the 200-day MA. Internal indicators support this reversal: the percent of TSX stocks trading above their 200-day MA did not confirm the index’s 2016 price low. It held above the Aug. 2015 low, creating a bullish divergence.