Vermilion ETF Pathfinder: Actionable ETF research & Ideas
ETF Technical Themes:• Top-down and bottom-up technicals continue to articulate a bullish outlook for equities.
• Global and sector rotation is underway. Technicals continue to depict a rotation from the U.S. to foreign equities (see page 2). The biggest beneficiary: emerging markets. This is true from both an absolute and relative perspective. On the absolute front, the EEM is breaking out above a downtrend dating back to the ‘07 peak. From a relative perspective, the EM/Developed ratio (EEM/EFA; see page 8) is breaking out from a multi-year base. Combined, charts point to an attractive outlook for emerging markets (and global markets as a whole).
Additional tailwinds are visible in:
1. The dollar continues to decline following its failed breakout last year (UUP).
2. Commodity currencies are breaking out from multi-year bottoms, including the Aussie and Canadian dollars (FXA, FXC).
3. Chinese technicals are strengthening (ASHR, FXI).
4. Commodities are stabilizing, especially base metals like copper (JJC).
5. The global Materials sector ETF (MXI) successfully reversed a long-term, relative strength decline. While the XLB's relative strength has yet to produce a similar uptrend, industry-based funds like metals & miners (XME), copper (COPX), and steel (SLX) are inflecting higher. Buy.
But, as we noted in our International Compass last week, the emerging market comment requires a caveat: EM's outperformance is nuanced; it's confined to large caps only. The small-cap EM/Developed ratio is still stuck in a multi-year decline. Further, sector weightings are playing a big role in the technical shift in favor of EM, especially technology. This sector accounts for a 27% weighting in the MSCI EM Index. In the MSCI EAFE (developed), a meager 6.1% weight.
• Health Care (XLV) continues to yield many of our favorite set-ups. Unlike other leading sectors, such as Tech (XLK), Health Care only recently broke out. Last month, the XLV emerged from a two-year base, accompanied by breakouts in biotechs (IBB, XBI). Buy.
• Growth continues to outperform value. No changes here, and we are unlikely to see this trend reverse until tech weakens and energy bottoms. (We are seeing incremental signs that energy is ready for a rally.)
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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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