Vermilion Compass: Weekly Equity Strategy
Continue to Add Exposure to Energy & MaterialsNote: This report is presented in an abbreviated format, as we are producing the January U.S. Macro Vision book this week.
This market is still characterized by what it lacks: topping patterns.
Outside of weakness in interest-rate sensitive segments, namely REITs and Utilities, the latter which is breaking down to 15-year relative strength lows, technicals remain constructive. And allowing for occasional back and filling, we expect this trend to continue, especially given the themes highlighted below:
• Internals are healthy. Advance/decline lines continue to confirm the market's advance.
• Cyclicals are leading. Cyclicals continue to lead. Energy and Materials, which we upgraded last week to overweight, just advanced in our relative strength rankings (“RSRâ€) to the #1 and #2 rank, respectively. In today's report we highlight actionable names in energy service stocks. Manufacturing also remains a long-term leader, trading just below all-time RS highs. Lastly, Consumer Discretionary exhibits steady improvements, buoyed by bottoms throughout retail (XRT), bullish inflections in autos (CARZ), and continued strength in homebuilders (ITB).
• Banks are poised to rally. Bank ETFs like KBE and KRE broke out in November from 10-month base patterns. Since, they've consolidated above support. We expect this to resolve in another upside move.
• Tech refuses to quit. The Sector's long-term price and relative strength uptrends remain intact, as does our overweight. Semis (SOXX) are bullishly inflecting--check out the base in MSCC--and Tech's advance-decline line is trending to new highs.
• Same for FAANG. Hate them or love them, FAANG stocks are bullishly inflecting to new highs, accompanied by attractive relative strength.
What could derail our bullish outlook? We're watching interest rates.
The 10-year Treasury yield's chart currently exhibits an in-progress base pattern. 2.62% is the key level to watch.
If rates break out above this level, confirming the pattern, the equity market's response will be telling: if it shrugs and continues to advance, great; however, if it stumbles and sector leadership breaks down, we may have to amend our outlook.
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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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