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Vermilion Compass: Weekly Equity Strategy

THEMES:

• Watch Financials. Financials hold the clue to the market's next intermediate-term move--whether up or down. The XLF's daily chart reveals a potential, 6-month top pattern (see below). As long as the ETF holds above $23, Financials--and the market's outlook--remains bullish and intact. However, a 2-3% close below this level would likely result in: (1) the XLF retreating back to support near $21, and (2) a market-wide correction. Alternatively, if this pattern does not play out, resulting in a failed top--a bullish sign--we would expect another leg higher. We're watching closely.

• Sector downgrades (2): Relative strength trends no longer warrant overweights in Materials and Transports. Downgrading both to market weight... see page 2

• Health Care continues to recover: Led by medical device stocks (IHI), Health Care continues to strengthen. (We highlight a selection of bottom-up ideas in last week's Compass.)... see page 3

• Stay overweight Manufacturing. The Sector's relative strength trend continues to consolidate just below all-time highs. A falling dollar is likely providing an updraft to many multi-nationals. For individual ideas, refer to last Friday's Insights report (available on-line)... see page 4

• Theme of the Week: Hotels & Casinos. Outside of Homebuilders, our Casino and Hotel-related Groups are the few bright spots in the Consumer Discretionary Sector. In this week's report we highlight names breaking out from base patterns, such as H, HLT, and MGM... see pages 8-21

• Highlighted Charts: BYD, CACQ, CHDN, CHH, CZR, ERI, H, HLT, HTHT, IHG, IHI, ILG, ISLE, LQ, LVS, MAR, MAS, MCRI, MGM, MLCO, NYNY, PENN, STAY, VAC, WYN, WYNN, XLF, XLV

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