Vermilion Compass: Weekly Equity Strategy
Pullback Begins; How Low Can Indexes Go?Since January, our expectation for 2023 has been for 4165 (and 4165-4200) to cap upside on the S&P 500. We have been preaching caution with the indexes testing resistance, and we are now getting confirmation that suggests a pullback has officially begun, with the S&P 500, Nasdaq 100 (QQQ), and Russell 2000 (IWM) all demonstrating false breakouts, alongside bullish inflections in Treasury yields, high yield spreads, and the U.S. dollar. Defensive Sectors (XLP, RYU, XLV/PPH) are also displaying bullish RS reversals at major supports. Despite the S&P 500 already approaching a support area 3990, the multitude of risk-off signals leads us to believe there is more downside ahead.
Index Overview. The S&P 500 broke below our 4090 support level on Friday, while the Nasdaq 100 (QQQ) and Russell 2000 (IWM) broke below $297 and $190, respectively, yesterday. As we discussed last week, breaks/closes below these levels indicate false breakouts and leads us to believe there is further downside ahead. On the S&P 500 we are watching 3940-3990 for signs of support. There is significant confluence of support here, including the prior downtrend that began in January 2022, the 4.5-month uptrend from the October lows, and the 200-day MA. Below 3940 is where things can get pretty ugly, with the next support levels being 3765 (December lows) and 3490 (2022 lows)... see chart below and page 4.
U.S. Dollar (DXY) and High Yield Spreads Following Treasury Yields Higher. In last week's Compass (Feb. 15) we noted how Treasury yields (1-, 2-, 5-, 10-, and 30-year) all displayed multi-month breakouts or downtrend reversals, and that we were monitoring for upside reversals in the DXY and high yield spreads as well, considering strong positive correlations with yields. This is exactly what has played out, as the DXY is reversing its downtrend, and high yield spreads are widening above their 4.5-month downtrend. Rising Treasury yields, DXY, and high yield spreads are all clear risk-off signals that suggest this pullback is in its early stages... see charts below and page 5.
More Failed Breakouts. In addition to ARKK and the aforementioned market indexes, we also have Discretionary (XLY) and Transports (IYT) are also reflecting failed breakouts below $148 and $234, respectively. This only adds to our bearish near-term bias... see page 6.
BJ's Restaurants operates in the casual dining segment of the restaurant industry. The company's restaurants feature a number of menu offerings including: slow roasted entrees, such as, prime rib; EnLIGHTened Entrees? such as its Cherry Chipotle Glazed Salmon; its deep-dish pizza; the Pizookie? dessert; and its BJ's proprietary craft beers. The company owns and operates restaurants located in various states, and its proprietary craft beer is produced at various locations, its Temple, TX brewpub locations and by independent third party brewers using its proprietary recipes. The company also produces its proprietary non-alcoholic craft sodas including root beer, ginger beer, cream, orange and black cherry soda.
Bloomin' Brands is a holding company. Through its subsidiaries, the company is a casual dining restaurant company. The company has four concepts: Outback Steakhouse, which is a casual steakhouse restaurant concept focused on steaks and Australian decor; Carrabba's Italian Grill, which provides Italian cuisine; Bonefish Grill, which focuses on fish, wood-grilled items and cocktails; and Fleming's Prime Steakhouse & Wine Bar, which is a steakhouse concept featuring beef, chops, fish, seafood and poultry, salads and side dishes. The company owns and operates restaurants across the U.S., Puerto Rico, Guam and other countries.
The Cheesecake Factory operates casual dining restaurants. The company operates Company-owned restaurants under: The Cheesecake Factory?, which provides menu including appetizers, pizza, seafood, steaks, chicken, burgers, small plates, pastas, salads, sandwiches and omelettes, and gluten-free items; Grand Lux Cafe?, which provides American dishes and international favorites, including appetizers, pasta, seafood, steaks, chicken, burgers, salads, and desserts; and RockSugar Southeast Asian Kitchen?, which showcases the cuisines of Thailand, Vietnam, Malaysia, Singapore, Indonesia and India. The company also produces desserts for its restaurants, international licensees and third-party bakery customers.
Chuy's Holdings is a restaurant concept that provides Mexican and Tex Mex inspired food. The company provides the same menu during lunch and dinner, which includes enchiladas, fajitas, rellenos, tacos, burritos, combination platters and daily specials, complemented by a variety of appetizers, soups and salads. Each of the company's restaurants also provide a variety of sauces, including the Hatch Green Chile, Boom-Boom and Creamy Jalapeno sauces. The company also provides a bar in all of its restaurants providing its customers a variety of beverage offerings, featuring a selection of cocktails including its on-the-rocks margaritas made with lime juice and the King's Punch, a rum cocktail.
Darden Restaurants is a restaurant company. The company owns and operates restaurants through subsidiaries in the U.S. and Canada under the Olive Garden?, LongHorn Steakhouse?, Cheddar's Scratch Kitchen?, Yard House?, The Capital Grille?, Seasons 52?, Bahama Breeze?, and Eddie V's Prime Seafood? trademarks. The company has four reportable segments: Olive Garden; LongHorn Steakhouse; Fine Dining (which includes The Capital Grille and Eddie V's); and Other Business (which includes Cheddar's Scratch Kitchen, Yard House, Seasons 52, Bahama Breeze and results from its franchise operations).
Texas Roadhouse is a restaurant company operating predominately in the casual dining segment. The company operates Texas Roadhouse restaurants and Bubba's 33 restaurants. In addition, the company operates restaurants outside of the casual dining segment. The Texas Roadhouse restaurants provide an assortment of steaks hand-cut on the premises and cooked to order over open grills. In addition to steaks, the company also provides its guests a selection of ribs, seafood, chicken, pork chops, pulled pork and vegetable plates, hamburgers, salads and sandwiches. Bubba's 33 is a sports restaurant. The company's menu features burgers, pizza and wings as well as a variety of appetizers, sandwiches and dinner entrees.
Vermilion Research delivers timely, actionable, and unique research inputs to professional investors. Our research strategists highlight securities which we believe are at major inflection points, based on our various proprietary technical indicators, and offer asymmetric risk/return profiles. We believe our research methodology, which is not limited by industry sector or market capitalization, enables us to deliver superior investment recommendations.
Our process begins by organizing all actively traded stocks into coherent sectors, then into logical industry groups. We then apply our proprietary relative strength tools to identify developing price trends. Once attractive trends are identified within a selected sectors or groups, we screen for individual stocks which we believe offer the best risk/reward profile. Vermilion offers U.S. and global equity market research products. Vermilion’s research team, which has received numerous awards and accolades, has a combined 70 year of experience in the analysis of investment securities.
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