Vermilion Macro Vision: U.S. Equity Strategy
STRATEGYWhen something is broken, we try to fix it. When something is operating smoothly we often blindly wonder when something is going to go wrong. As technicians the only negatives we currently see in the U.S. equity market is most certainly the extent to which the indices' are trading above their respective 200-day moving averages. Aside from sector rotations there is not much we can put in the “con†column in our assessment of this market.
• Internals remains healthy: The Russell 3000 continues to exhibit a healthy advance/decline line and remains near all-time highs.
• Cyclicals remains leadership: This suggests the economy is running on all cylinders as Manufacturing, Technology and select Transports (truckers) remains leadership.
• Defensive areas of the market are not leadership: While these areas have experienced bounces in the last week, the moves were insufficient in changing their chart structures and suggest nothing other than oversold reflex rallies.
• Small vs. large caps: The last few weeks have seen large-caps gain ground vs small-caps, however, there is not sufficient evidence to indicate anything other than a possible consolidation in small-caps, and the overall technical pattern does not denote any material trend breakdown.
• Interest rates: Despite a continued unwinding of bonds by the Fed, yields have not climbed to a 52-week high and suggests a consolidation is in the works. A decisive move above the 2.6% level on the 10-year Treasury would be an indication to look for higher rates and would likely pressure equities.
• Technicals remains constructive overseas: Perhaps the greatest concern is the extended nature of overseas markets. “Too far, too fast†often leads to a pullback or a consolidation and we believe this is likely. Japan has broken topside a 30-year base and is suggestive of a further bullish move. Emerging markets remain constructive, but RS has been waning vs. the S&P 500 for the last several months. We view this as a consolidation rather than a move to safety at this time.
• US Dollar: The greenback has staged a reversal and a bullish head-and-shoulders bottom. This is likely the reason that emerging markets are consolidating as investors wait to get more clarity on the greenbacks direction.
In the remainder of our September Strategy (see attached) we highlight opportunities within the following Sectors.
• Energy: Market Weight. Energy has shown a significant improvement over the last several months. A majority of the E&P's are breaking topside of their respective 200-day moving averages. A number of offshore drillers, which have lagged significantly over the last several years are reversing long-term downtrends and breaking above their respective 200-day moving averages.
• Financials: Overweight. Financials continue to demonstrate long-term leadership characteristics, with many breaking out to new highs or break above major bases.
• Technology: Overweight. Technology continues to reign in terms of leadership. The bases in this Sector are enormous, dating back to the 2000 bubble, and we believe that the upside potential after many years of consolidation is significant.
• Manufacturing: Overweight. The main stalwart of strength had been within the confines of the aerospace industry, however automobile, truck, and construction equipment have garnered much of the attention over the last few months. We believe this is a positive sign for the economy.
Open the attachment to find our complete U.S. equity strategy document, as well as links to our respective sector commentaries.
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Continental Resources is an independent crude oil and natural gas company engaged in the exploration, development, and production of crude oil and natural gas mainly in the North, South and East regions of the U.S. The North region consists of properties north of Kansas and west of the Mississippi River and includes North Dakota Bakken, Montana Bakken, and the Red River units. The South region includes all properties south of Nebraska and west of the Mississippi River including various plays in the South Central Oklahoma Oil Province and Sooner Trend Anadarko Canadian Kingfisher areas of Oklahoma. The East region is comprised of undeveloped leasehold acreage east of the Mississippi River.
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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