Report
Vermilion Research
David Nikoski
EUR 196.90 For Business Accounts Only

Buy energy, materials, and mfg: CXO, DE, DOV, EMR, ETN, FLS, GPOR, HP…

​Highlighted Themes:

  • Market Overview: Risk-on remains intact; small caps are beginning to outperform... see pages 1-6
  • Sector Commentary: Maintain overweights in late-stage cyclical sectors; financials and tech continue to exhibit steady improvements (increase exposure); health care is recovering... see pages 7-9
  • Actionable Groups & Constituents: Energy Groups and bottom-up ideas in Manufacturing... see pages 10-21

    • Market Observations:

    If we ignore headlines — Yellen said this and didn’t say that — and focus on general conditions — late-stage cyclical sectors are leading, tech and financials are recovering, small caps are beginning to outperform, emerging markets are bottoming, the dollar is deteriorating — the weight of the evidence still sends a bullish message. We have stuck with this outlook for the past three months, and we see no reason to abandon it now.

    Considering both the bullish market environment and the confines of this report’s length, it’s becoming easy to neglect actionable themes -- too many exist. Instead of concentrating on several Sectors -- as we typically do -- we listed out a miscellany of ideas and observations below, followed by a selection of related charts. Combined, they (1) provide actionable ideas, and (2) repeat the premises for the bullish case.

  • Large-cap indexes are closer to new highs, but small and mid caps are outperforming. The Russell 2000/S&P 500 ratio is bullishly inflecting, trading at new YTD highs. Ditto for the Mid-Cap 400/500 ratio. And between small and mid caps, the former is beginning to take the lead; the Russell 2000/400 ratio depicts a multi-month bottom. Increase exposure to the bottom portion of the market-cap spectrum.
  • Value is outperforming growth. Another theme that we have highlighted since March, value/growth ratios are inflecting in favor of value. No surprise here given the strength in late-stage cyclical sectors (and, more recently, financials). Stay overweight value (but recognize opportunities still exist in growth areas, like Tech).
  • Late-stage cyclical Sectors are leading -- overweight. Three of our four overweight recommendations, Energy, Materials, and Manufacturing continue to top our weekly rankings. A scan of each Sector’s constituent charts reveal patterns (bottoms and bases) that project further upside. Many pullback set-ups are transitioning into bullish inflections, including: CVX, CMI, EMR, ETN, FAST, APD, EMN, FCX, MUR, PPG, PXD, PX, and UTX. Increase exposure.
  • Tech is staging a comeback. Our equal-weighted Sector’s relative strength trend is rebounding off its 3-year uptrend. Semis and suppliers like TXN, MCHP, and QRVO are leading this advance, as once-laggards like AMBA bottom. Lastly, AAPL is a failed breakdown (though relative strength is still unattractive). Increase exposure to tech.
  • Financials are strengthening, even in the face of last week’s interest-rate retreat. Insurers are internal leadership, but strength is broadening, with banks and brokers overtaking resistance. Even asset managers are showing signs of bottoms: APAM, AMG, AMP, BEN, IVZ, etc.
  • Health Care is recovering. HMO stocks were jump started last week, with HUM and AET popping more than 6%. Biotechs like VRTX are beginning to bottom one by one. And elsewhere, strength is evident in medical devices and equipment such as MDT.
  • Large-cap rails are bottoming. As airline stocks struggle, the rails are filling the void. Names like CNI, CSX, and UNP are attractive bottom-fishing candidates.
  • Construction & Engineering stocks are emerging from bottoms. FLR and PWR are two large-cap ideas.
  • High-yield funds continue to advance. Both JNK and HYG continue to produce upside follow-through, products of sharp v-bottoms.
  • Defensive Sectors depict the “ideal” combination of (1) attractive price patterns coupled with (2) weakening relative strength trends. This hot-and-cold combo is typical of a risk-on environment.
  • Emerging markets are bottoming. A feature of our International Compass reports over the past two months, the MSCI EM Index is building a bottom right on top of an 18-year trendline. Related ETFs like EEM, IEMG, and VWO depict in-progress head & shoulders bottoms -- accumulate. Also featured in recent reports, prominent markets like Brazil and India are bullishly inflecting. Even China, scorned by the media, appears to be bottoming. Increase exposure to EM.


    • 07/06/2016 30 EN
    Provider
    Vermilion Research
    Vermilion Research

    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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    David Nikoski

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