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Vermilion Compass: pullback opps in mfg: AON, BRO, FLS, GE, ICE, MAS..

​Highlighted Themes

Market Overview: Risk-on remains intact... see pages 1-5

Sector Commentary: Maintain overweights in late-stage cyclical sectors; financials and tech continue to exhibit steady improvements (increase exposure); defensive sectors depict waning relative strength... see pages 6-8

Actionable Groups & Constituents: Regional banks, semis, and building products... see pages 9-18

Market Observations

We are maintaining our cautiously optimistic outlook as the technical weight-of-the-evidence still favors the risk-on trade. The supporting signs, which we’ve covered extensively over the past two months, remain intact: developing leadership in late-stage cyclicals, recovery in financials, trailing relative strength in defensive sectors, etc. More recent additions to this list include: (1) a recovery in the Tech Sector, noted in Monday’s Semiconductor-themed Insights report; and (2) steady strength in small and mid caps, both which are breaking out to YTD relative strength highs versus the S&P 500. The only concerning item is the weakness in the Consumer Discretionary Sector, namely retail stocks (ex-AMZN).

In the remainder of today’s report, we highlight a miscellany of observations, which, when taken individually, offer actionable themes, and when taken together, support our risk-on outlook.

Indexes continue to trade above their 200-day moving averages. From the equal-weight S&P 500 (below) to the Russell 2000, the major U.S. indexes are rebounding above their 200-day MAs.

Our Financial Sector’s RS trend is bullishly inflecting. As we have stated before, we don’t need Financials to lead to maintain a bullish outlook on the market, but they must participate. And participating they are, ranging from insurers and regional banks to electronic exchanges and asset managers, a laggard space finally exhibiting improvements.

Technology’s RS trend is rebounding at support. Tech, which we have held at overweight, is resuming its long-term leadership status, thanks to a variety of developments including (1) AAPL’s failed breakdown below $92 and (2) bullish inflections throughout our Semiconductor Groups. Increase exposure.

Manufacturing contains numerous pullback opportunities. Following this week’s review of every chart in the S&P 500, 400, and Russell 2000, one thing is evident in Manufacturing: pullback opportunities are in generous supply, particularly in large-cap names: CAT, BEAV, EMR, ETN, FAST, FLS, GE, GGG, GPC, GWW, LECO, OSK and PCAR. Many of these names are just emerging from technical bottoming processes.

Rail stocks are attempting to bottom. If the market is recovering based on improving economic conditions, one Group we would expect to participate is the rails. Large-cap names are beginning to exhibit bottoming patterns, bucking the weakness in other Transportation segments like airlines. Names we like as bottom-fishing opportunities include: CNI, CSX, KSU, and UNP.