EUR 217.56 For Business Accounts Only

Vermilion ETF Pathfinder: Actionable ETF research & Ideas

Technicals support an emerging inflation trade

U.S. Equities
• Bullish Big Picture. Long-term trends, though arguably extended, have yet to depict signs of deterioration. We remain bullish for a variety of reasons, ranging from: (1) cyclical sector leadership; (2) weakness in defensive sectors, where utilities and staples are breaking down to 12+ month relative strength lows; (3) confirming points 1 and 2, the Consumer Discretionary/Staples ratio (XLY/XLP), a barometer of risk appetite levels, continues to confirm the market advance; and (3) confirming, bullish trends overseas, with emerging markets leading.

• Thematic Trade: Inflation. Perhaps less of a contrarian theme than several months ago, inflation appears likely to be a prominent theme this year. In addition to fundamental factors like full employment, a variety of technical trends are on the cusp of confirming this outlook:

1. The 10-year Treasury yield is building a 13-month base, with a 2.62% being the key level to watch;
2. Gold (GLD) is working through a larger, multi-year base. Here, $1,377 ($131 for GLD) is the level to watch;
3. Commodities are bottoming, with DBC breaking out from a bottoming process;
4. The 10-year breakeven inflation rate is on the cusp of a breakout;
5. Emerging markets (EEM) are outperforming; and
6. Commodity-related industries are also breaking out, including miners and energy. On this last point, we see opportunity for outperformance. We've highlighted set-ups in this theme for months (copper, metals & mining, E&Ps, fertilizer, etc.), but we don't think it's too late to add exposure.

• Sector Overweights: Energy (XLE), Financials (XLF), Industrials (XLI), Materials (XLB), and Tech (XLK)... see pages 3-7

• Actionable Industry ETFs: XME, SLX, COPX, IXC, XOP, FCG, OIH, CARZ... see pages 8-9
International Equities

• Bullish Big Picture; Overweight EM. Foreign markets remain on a bullish trajectory. Here, too, we expect the long-term uptrend to continue, allowing for occasional backing and filling. We still favor EM (EEM) and Japan (DXJ). Europe, while exhibiting bullish price patterns, continues to lag. Buy: DXJ, EWY, EWZ, ERUS... see pages 10-11

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