Int'l Macro Vision: Global Equity Strategy - Weak $ trade
​As a recreational pilot returning to flying after a multi-year hiatus, I’m finding myself paying extra attention to weather – even more so than a typical Midwesterner – especially to wind reports. It’s the wind, after all, which dictates so many variables in flight: from runway selection to flight levels to arrival times. And with the exception of takeoff, the best “kind†of wind is the one at your back, the tailwind.
As technicians focusing on relative strength, we approach the market in a similar philosophical vein: identify the technical tailwinds then align over/underweights accordingly. Heading into the year, the correct alignment was an overweight in developed markets (primarily the U.S.) and defensive-leading sectors and an underweight in (most) emerging markets and commodity-related sectors. How quickly things change.
Winds aloft are shifting, and both the charts and our relative strength rankings – a windsock for the market – are indicating changes in leadership, some slight, others abrupt. While most market segments depict improvement, the primary beneficiaries are emerging markets and commodity-related countries, currencies, and sectors.
The obvious nucleus of this theme is the weakening U.S. dollar. As seen below, the U.S. Dollar Index (which excludes EM currencies) is nearing an important breakdown below the 93 level. If this level gives way, we expect to see another updraft in the budding EM/commodity theme.
Returning to equities, the recovery in these once-laggard segments points to an improving technical outlook for global markets as a whole. They are no longer a drag on breadth. Showcasing these improvements is the MSCI ACWI, which is recovering from a failed breakdown and is now trading above its 200-day MA.
In the remainder of today’s Strategy we expand on the individual tailwinds (opportunities) and headwinds (concerns) listed below.
Developing technical tailwinds (bullish):
ï‚· Emerging Markets: The EM/EAFE ratio is bullishly inflecting. Increase exposure.
ï‚· Energy & Materials Sectors: Materials is exhibiting new leadership qualities. Energy, less so, but improving.
ï‚· Europe: The STOXX 600 depicts a potential price bottom.
Intact technical headwinds (bearish):
ï‚· Japan: Stabilizing, but the yen is a headwind and the TOPIX remains below 1,400.
 Banks: Also stabilizing, but we’re still waiting on bullish reversals.
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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