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Vermilion Int'l Compass: Global Equity Strategy

Expecting Downside Ahead; Stick With Defensives

Rallies appear to be stalling-out near logical resistances in the largest global equity markets (U.S., Japan, and Europe). That includes 5670-5783 on the S&P 500, 2690-2700 on Japan's TOPIX, and 4884 on Europe's EURO STOXX 50. We continue to believe these indexes will roll over near current or marginally higher levels. It all fits with our ongoing belief (since our July 25, 2024 Int'l Compass) that global equities (ACWI-US) are going through a 1- to 4-month pullback/consolidation (we are now just over one month in). Moreover, this could end up being a topping pattern. Our outlook remains neutral on global equities (as of our August 8, 2024 Int'l Compass) after being bullish since early-November 2023. Long-term uptrend violations on global indexes and continued outperformance from defensive Sectors are our top concerns for global equities, though we are also concerned about a weakening labor market/possible recession in the U.S. (Sahm rule and Schannep Recession Indicator have both triggered) and a Fed that is behind the curve on its cutting cycle -- not to mention the fact that prior Fed cutting cycles have historically not been good environments for stocks (e.g., Jan. 2001 and Oct. 2007). Defensive Sectors (Utilities, Health Care, Telecommunications, and Consumer Staples) remain our primary focus in terms of Sector and individual stock recommendations, and we continue to urgently recommend shifting exposure to defensives.

Downgrading Taiwan. We are downgrading Taiwan (TAIEX) to market weight due to its 6.5-month RS uptrend violation -- reduce exposure. This is a reflection of deterioration within Technology (especially Taiwan Semiconductor). That means our last remaining country overweight is the U.S. (S&P 500)... see chart below.
Big Picture Trends. Broad global MSCI indexes (local currency) including the ACWI, ACWI ex-U.S., EAFE and EM are all below resistance from their YTD highs and we continue to expect more consolidation (at best) and possible topping patterns (at worse). U.S. and European high yield spreads are not flashing major warning signs, but defensive Sectors outperforming and a major breakdown in the global Discretionary vs. Staples ratio is a clear risk-off signal that often precedes larger corrections... see chart below and page 2.
Actionable Themes: Utilities, Health Care, Telecommunications, Consumer Staples, and Real Estate. We continue to use the latest rally as an opportunity to shift exposure to global defensive Sectors... see pages 3-23.