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Vermilion Compass: Weekly Equity Strategy

Heightened volatility; Further consolidation

Equity markets have remained volatile, consolidating between the recent high in late January and the low on February 9th. While the market has yet to retest either the highs or the lows, we still see both as critical levels. With support levels holding, we retain our long-term bullish stance despite the expectation of continued volatility and consolidation. Our outlook is supported by the following:

• Cyclicals remain leadership. Consumer Discretionary and Technology have continued to outperform, and remain at the top of our relative strength rankings (“RSR”) from a cap-weighted perspective. On the other hand, defensive Utilities and Consumer Staples have languished at the bottom of our RSR ranks for quite some time, a hallmark of bull market advances... see page 2.

• Healthy market internals. Advance/decline lines and both equal- (RCD/RHS) and cap-weighted (XLY/XLP) Consumer Discretionary/Staples ratios remain in uptrends, suggesting no significant damage. These should diverge prior to a meaningful market top, something we have yet to see.

• Financials remain strong. Financials (XLF) continue to participate in the market advance, with bank and broker-dealer ETFs (KBE, KRE, and IAI) hitting new price and relative strength highs. We reiterate our overweight Financials recommendation.

• Semiconductors are leading Tech higher. Within Technology, semiconductors (SMH/SOXX) remain leadership. Continue to stick with this Sector and Group; we reiterate our overweight recommendation.

• In today's report we highlight attractive and actionable groups within Technology and Financials. Within Tech we focus on TE-01 and TE-02, our Large- and Mid-Cap Semiconductor Groups (respectively), and within Financials we highlight FN-34, our Electronic Exchanges/Markets Group... see pages 7-19.