EUR 196.56 For Business Accounts Only

Compass: Bullish REITs, health care & consumer names

​Highlighted Themes

Market Overview... see pages 1-5

Sector Commentary: Late-state cyclical Sectors are relieving overextended rallies (stay overweight); increase exposure to REITs; biotechs are attempting to bottom, but it’s still a stock-picking space... see pages 6-8

Actionable Groups & Constituents: REITs are exhibiting impressive breadth and attractive patterns -- increase exposure ... see pages 9-16

Market Observations

Reversion-to-the-mean forces are sweeping through the YTD leader board: emerging markets and anything commodity-related. Some see this is an abrupt end to their outperformance; we see it as a well-needed retracement – also, a pullback opportunity. Nothing has changed, technically speaking. The late-stage cyclical Sectors – Energy, Materials, and Manufacturing – still depict bottoming patterns, improving breadth, and top our weekly RSR rankings. The U.S. Dollar Index, despite the current rebound, still exhibits a topping pattern. Accordingly, we are maintaining our overweight recommendations.

Since most of our reports over the past month have focused on the above three Sectors, in today’s Compass we shift gears, focusing on notable improvements in three of our market weight recommendations: Financials, Health Care, and Consumer Discretionary.

Financial Sector (Market Weight)… Insurers, Electronic Exchanges, and REITS are leading a rebound in our Financial Sector. REITs, in particular, which are the focus in the second-half of today’s report, depict great breadth and actionable base patterns – one look at the iShares Real Estate ETF (IYR) says it all. This is likely a product of the retreat in interest rates. What about banks and asset managers? They’re participating, but have more overhead resistance to work through. Combined, our equal-weighted Sector depicts a relative strength rebound near support. Internals support this message of improvement. Looking at the S&P 500 Financial Sector, the advance-decline line (cumulative) is rallying to new highs ahead of the underlying Sector – a sign of internal strength (see cover page). This is a positive sign for the broad market.

Health Care Sector (Market Weight)… Health Care’s leadership status fell into remission last August and has not recovered since. And while it is still far from being an overweight-candidate, technicals are stabilizing, and, in many cases, improving. Like Financials, this is depicted in the Sector’s advance-decline line, which is advancing ahead of price. Internal Group leaders are scattered, but our Cardiovascular Group (MDT is breaking out) and Diagnostic & Test Services (bases in LH, DGX, NEO) Group come to mind for their improving breadth. Biotechs, of course, are still the focus. Will they ever recover? We are starting to see signs of a bottoming process, at least from a bottom-up perspective. Swift sell-offs in names like GILD don’t help sentiment, but others, including VRTX, BIIB, AMGN, LGND, and ARIA, are establishing bottoming patterns. Another positive sign for the broad market.

Consumer Discretionary Sector (Market Weight)… The latest earnings season did not pass over Consumer Discretionary without knocking it around. And it shows: relative strength has waned and selectivity has increased. That said, sifting through all our Groups and constituents, we are still finding a variety of attractive charts. A sample: Home Furnishings (LEG, LZB, SCSS, ETH), Toys (HAS, MAT, BBW), Fast-Food Restaurants (MCD, YUM, QSR, PNRA), Casual Dining Restaurants (DRI, TXRH, BLMN, BJRI, WING, ZOES, FOGO), Off-Price Retailers (TJX, ROST, BURL), Discount/Variety Retailers (DG, DLTR, MIK, BIG), Home Improvement Retailers (HD, LOW, SHW, TTS), and Lawn & Garden (TSCO, BGG, CENTA). An overweight candidate? No, it’s still early. But the Sector is not as bad, technically speaking, at second glance.