Vermilion Macro Vision: Sector Synopsis
STRATEGYIn our 11/10/20 Compass we highlighted our belief that current market dynamics suggest eventual decisive breakouts as the most likely outcome for the S&P 500, Russell 2000, and Nasdaq 100, and that dips should be bought. These indexes and market dynamics have only improved since November 10. As a result, our outlook remains bullish and we believe that the path of least resistance is higher for equities. Below we summarize the basis for our bullish outlook, and we discuss the deservedly hot topic of value vs. growth.
What supports our bullish outlook? (1) The S&P 500, Russell 2000, and Dow Jones Industrial Average are breaking out to all-time highs. (2) The Russell 2000 vs. S&P 500 ratio (small- vs. large-caps) displays a long-term bullish reversal as it hits 9-month highs – a bullish sign for the broad market. (3) Not one Sector is breaking below support in terms of price. (4) Defensive areas such as Consumer Staples and Real Estate continue to make lower highs in terms of relative strength. (5) Cap- and equal-weighted Discretionary vs. Staples ratios continue to make higher lows. (6) The US dollar (DXY) remains below 95-96 major resistance. (7) Breadth is healthy across all market-caps as measured by advance/decline (A/D) lines for the Russell 3000, S&P 500, and Nasdaq 100. (8) High yield spreads continue to make lower highs. (9) The 10-year Treasury yield is at multi-month highs and shows bottom potential. (10) Broad commodities are devoid of bearish inflections. (11) Emerging market equities (EEM) are making bullish price inflections and RS shows bottom potential.
These are all signs of a risk-on environment, and one where a bullish outlook is appropriate. The risks to our bullish outlook would be a scenario where the inverse of the bullish items listed above start to unfold.
Value vs. Growth & Sector Weighting Changes: Three weeks ago we began placing an added emphasis on value vs. growth ratios, positing that there is potential for value to outperform with the 10-year Treasury yield near 8-month highs. Our Sector weighting recommendations have gradually shifted in favor of value Sectors, as we downgraded Communications to market weight and recommended adding exposure to banks over the past month. Today we are making additional Sector weighting changes as we continue to shift toward value; we are upgrading Manufacturing and Transportation to overweight, and upgrading Energy to market weight. Overall we remain neutral on value vs. growth, however we are watching the 10-year yield, US dollar, and commodities – along with value vs. growth ratios – for signs of a longer-term shift in favor of value.
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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