Report
Dave Nicoski ...
  • Ross LaDuke
EUR 48.00 For Business Accounts Only

Vermilion Compass: Weekly Equity Strategy

Downgrading Consumer Discretionary & Health Care to Market Weight, Staples & Utilities to Underweight

Since January 2023 we have discussed how we anticipate 4165-4200 to cap upside on the S&P 500 for 2023, but that a rally to 4300-4325 is also possible; this remains our view. There continues to be little traction above 4200. In our 5/2/23 Compass we discussed how the Nasdaq Composite was testing 12,300 resistance, and that a breakout and reach to 13,180 is possible. This seems to be playing out with the Nasdaq Composite hitting 13,154 yesterday as Technology (XLK), and to a lesser extent Communications (XLC), are seemingly in a blowoff stage, while all other Sectors are neutral to bearish.

Sector Downgrades. As referenced above, price and RS is neutral at best for all Sectors outside of cap-weighted Technology (XLK) and Communications (XLC). Due to recent RS deterioration, we are downgrading Consumer Discretionary (RCD) and Health Care (RYH) to market weight, and we are downgrading Consumer Staples (XLP) and Utilities (RYU) to underweight. Weak breadth remains a major concern, but we continue to believe that this does not have to end badly -- but it could. There is a possibility that large-caps (AAPL, META, MSFT, GOOGL, NVDA, etc.) could pause or see slight outflows, which could allow for capital to be disbursed to other areas, thereby providing a catalyst for breadth to expand. So far, it has been Technology and cap-weighted Communications doing well, and not much else. We will continue to monitor for any change in this dynamic... see pages 2-4.
S&P 500, Russell 2000. S&P 500 resistance at 4200 remains the gateway to 4300-4325 while support at 4100-4050 is the gateway to a more meaningful pullback. The S&P 500 is also currently testing resistance at its 2-month megaphone pattern. The Russell 2000 (IWM) is consolidating between $170 and $180, but has reversed above the 3.5-month downtrend... see page 5.
High Yield Spreads. High yield spreads remain a concern... see page 5.
Underlyings
Copa Holdings S.A. Class A

Essent Group Ltd.

Franklin Electric Co. Inc.

Franklin Electric Company designs, manufactures and distributes water and fuel pumping systems, composed primarily of submersible motors, pumps, electronic controls and related parts and equipment. The company's business consists of three segments: Water Systems, which designs, manufactures and sells motors, pumps, drives, electronic controls, monitoring devices, and related parts and equipment; Fueling Systems, which designs, manufactures and sells pumps, pipe, sumps, fittings, vapor recovery components, electronic controls, monitoring devices and related parts and equipment; and Distribution, which operates as a collection of wholly owned groundwater distributors known as the Headwater Companies.

Granite Construction Incorporated

Granite Construction is a holding company, which delivers infrastructure solutions for public and private clients. The company's segments are: Transportation, which focuses on construction and rehabilitation of roads, pavement preservation, bridges, rail lines, airports and marine ports; Water, which focuses on water-related construction and water management solutions; Specialty, which focuses on construction of various complex projects including infrastructure/site development, mining, public safety, tunnel and power projects; and Materials, which focuses on production of aggregates, asphalt and construction related materials as well as proprietary sanitary and storm water rehabilitation products.

Hubbell Incorporated Class B

Hubbell is primarily engaged in the design, manufacture and sale of electrical and electronic products for a range of non-residential and residential construction, industrial and utility applications. The company has two segments: Electrical, which comprised of businesses that sell stock and custom products including application wiring device products, electrical products, connector and grounding products, lighting fixtures and controls, components and assemblies, as well as other electrical equipment; and Power, which consists of operations for the design, manufacture and sale of transmission and distribution components primarily for the electrical utilities industry.

KBR Inc.

KBR provides services and technologies across the asset and program life-cycle within the government services and hydrocarbons industries. The company has three segments: Government Solutions, which provides life-cycle support solutions to defense, space, aviation and other programs and missions for military and other government agencies; Technology Solutions, which combines technologies, equipment and catalyst supply, digital solutions and associated knowledge-based services into a global business for refining, petrochemicals, inorganic and specialty chemicals; and Energy Solutions, which provides life-cycle support solutions across the upstream, midstream and downstream hydrocarbons markets.

MasTec Inc.

MasTec is an infrastructure construction company operating mainly throughout North America across a range of industries. The company's segments include: Communications, which performs engineering, construction, maintenance and customer fulfillment activities related to communications infrastructure; Oil and Gas, which performs engineering, construction and maintenance services on oil and natural gas pipelines and processing facilities; Electrical Transmission, which performs engineering, construction and maintenance of electrical transmission lines and substations; and Power Generation and Industrial, which performs installation and construction of power facilities.

MYR Group Inc.

MYR Group is a holding company of electrical construction service providers. Through its subsidiaries, the company serves the electric utility infrastructure, commercial and industrial construction markets located throughout the U.S. and Canada. The company manages its operations through two segments: Transmission and Distribution, which provides services on electric transmission and distribution networks and substation facilities; and Commercial and Industrial, which provides services such as the design, installation, maintenance and repair of commercial and industrial wiring, installation of traffic networks and the installation of bridge, roadway and tunnel lighting.

NEW MAURITIUS HOTELS

Powell Industries Inc.

Powell Industries develops, designs, manufactures and services custom-engineered products and systems which distribute, control and monitor the flow of electrical energy and provide protection to motors, transformers and other electrically powered equipment. The company's principal products include integrated power control room substations, custom-engineered modules, electrical houses, distribution switchgear and control gear, medium-voltage circuit breakers, monitoring and control communications systems, motor control centers and bus duct systems. The company assists customers by providing services including spare parts, field service inspection, installation, commissioning, and modification and repair.

Radian Group Inc.

Radian Group is a holding company. Through its subsidiaries, the company provides mortgage insurance and products and services to the real estate and mortgage finance industries through its two business segments: Mortgage Insurance and Services. The company's Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, as well as other credit risk management solutions, to mortgage lending institutions and mortgage credit investors. The company's Services segment is primarily a fee-for-service business that provides an array of real estate, title and mortgage services to market participants across the mortgage and real estate value chain.

Versarien

Versarien is an IP-led engineering materials group that utilizes proprietary technology to create new engineering solutions. Co. consists of two main business segments: graphene and plastics focused on delivering graphene solutions through plastics and carbon fiber composites and thermal and hard wear products focused on delivering copper, aluminum and tungsten carbide products.

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.

Analysts
Dave Nicoski

Ross LaDuke

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