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Vermilion Int'l Compass: Global Equity Strategy

Still Bearish, But On Watch for Bear Market Rally

Downtrends remain intact on the MSCI broad global indexes and also within Japan, Hong Kong, Europe, Germany, and China. We are bearish at the index level as long as these downtrends continue, but it is worth noting that the DAX is currently testing key downtrend resistance while the Hang Seng, MSCI China (MCHI-US), and China Internet (KWEB-US) are similarly testing their respective multi-month downtrends. Reversals of these downtrends would signal a bear market rally in progress, though we will need to see more basing, followed by base breakouts, in order to get bullish -- a process that would likely take weeks or months.

Downtrends Intact. Downtrends remain intact for Japan's TOPIX/Nikkei 225, Hong Kong's Hang Seng, Europe's EURO STOXX 50, Germany's DAX, China (MCHI-US, KWEB-US), and all the MSCI global indexes (ACWI, ACWI ex-US, EM, and EAFE). We are bearish as long as these downtrends continue. We see the potential for a bear market rally, but until we see market dynamics improve, it will likely set up a selling/shorting opportunity... see charts below and page 2.
US Dollar Top to Fuel Non-US Equities? The strong US dollar (DXY) has been a clear risk-off signal, and we have wanted to see the DXY form a top to help confirm a bottom for global equities. We are seeing promising signs that the DXY could be topping as it broke below the major $104 level, though we would like to see it get below $99.40 to help solidify and confirm a topping pattern. As long as the DXY remains below $104 we expect to see outperformance from EM and non-US equities... see page 3.
Stick With Defensives & Commodity Sectors. Our preferred Sector overweights continue to be defensives (Utilities, Staples, Health Care, & Telecommunications) and commodity Sectors (Energy & Materials).
Actionable Theme: Defensive Sectors. Defensive areas of the market continue to shine amid ongoing downward pressure on global equities. We highlight several attractive and actionable names within the Health Care, Telecommunications, Utilities, and Consumer Staples Sectors... see pages 4-16.