Vermilion ETF Pathfinder: Actionable ETF research & Ideas
BIG PICTURE... see page 2• Our outlook remains bullish. Both top-down and bottom-up observations promote a positive outlook: indices are trading at new highs; cyclicals are leading; defense is lagging; and small-caps are outperforming.
• What could derail our bullish stance?: the rate of change in interest rates (i.e. a slow-and-steady advance is fine, a surge is not). So far, this has not been a problem.
• Value is leadership relative to growth. This is particularly true of small caps, where the Russell 2000 Value/Growth ratio is reversing a 10-year decline (IWN/IWO ratio). Overweight value.
U.S. SECTORS... see pages 3-4
• Cyclicals > Defense (still). Overweight the former, underweight the latter.
• Overweights: Energy, Financials (Oct. 28 recommendation), Materials, Industrials, & Tech.
• Increase exposure to Consumer Discretionary. The equal-weighted ETF, RCD, is breaking out.
U.S. INDUSTRIES... see pages 5-9
• Retailers are strengthening. The SPDR Retail ETF (XRT) just broke out from a 12-month base. Buy.
• Other attractive themes: cyber security (HACK), metals & mining (XME), E&Ps (XOP), & nat gas (FCG).
• Many leading industries like Semis (SOXX) and banks (KRE) are extended. Wait for pullbacks.
INTERNATIONAL EQUITIES... see pages 10-13
• Add exposure to China. The Shanghai Composite is bottoming, and related ETFs like ASHR (local shares) and FXI (H-shares) depict attractive entry points.
• Buy currency-hedged Japan on pullbacks (DXJ). Both the Nikkei 225 and TOPIX indexes are breaking out from YTD bottoming patterns, as the yen (FXY) weakens.
• Frontier markets (FM) are working through a bottoming process -- an unexploited opportunity.
• European banks are bottoming. Take advantage of this still-contrarian theme with the EUFN ETF.
BONDS, COMMODITIES, & CURRENCIES... see page 14
• Commodities (DBC) continue to carve out technical bottoms. Base metals (DBB) are leadership.
• Palladium (PALL) is breaking out from a 16-month base. Buy.
• Bond funds, from Treasuries (TLT) to EM (PCY), are technically broken. They are also oversold, but we are not seeing signs of bottom patterns, and we do not recommend adding exposure. One exception: U.S. high-yield. Funds like JNK and HYG are rebounding off their 200-day MAs. Buy.
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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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