EUR 43.84 For Business Accounts Only

Vermilion Compass: Weekly Equity Strategy

10-Yr Treasury Yield Breaking Out; Downgrading Consumer Staples and Utilities To Underweight

Last week's FOMC announcement was more hawkish than expected, and the market took the news in stride. Market dynamics have improved significantly since the announcement, which has us inching toward an outright bullish outlook; we are just waiting for price breakouts from cyclical areas including small-caps (IWM), Financials (XLF), and Energy (XOP).

Conditions Improving. The 10-year Treasury yield broke above the key 1.38% resistance level last week, a very bullish signal for the broad equity market as it signals improving expectations for the economy. The rising 10-year yield has significant implications, particularly on small-caps (IWM) and value (IWF), and we are already getting bullish reversals in the small-cap vs. large-cap ratio (IWM/SPY) and the value vs. growth ratio (IWF/IWD). Add exposure to small-caps and value; we expect them to play catch-up as long as the 10-year is above 1.38%. High yield spreads are hitting 2+ month narrows, another risk-on signal and a vote of confidence for the economy. RS for defensives (Staples & Utilities) is breaking to new YTD lows, and we are downgrading both Staples and Utilities to underweight -- reduce exposure. Additionally, the cap- and equal-weighted cyclicals vs. staples ratios (XLY/XLP and RCD/RHS) are breaking out to new highs. These are meaningfully bullish, risk-on developments.... see charts below & pages 2-5.
Small-Caps, Cyclicals Still Consolidating. Small-caps (IWM), Financials (XLF), Energy (XOP), and equal-weighted Discretionary (RCD) continue to consolidate as they have for months. In order for us to turn bullish, we need to see breakouts to new YTD highs, which would signal the end of the "mixed environment," and the start of a broad-based advance... see below & page 6.
S&P 500. The S&P 500 broke below the 50-day MA, but found support at our first support level at 4305-4310 for a peak-to-trough decline of just over 5%. 4305 remains support; should 4305 break, our next support levels to watch would be 4257, 4233, and 4164. 4535-4545 remains short-term resistance.