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Vermilion Int'l Compass: Global Equity Strategy

Broad Indexes Violate Support But Bright Spots Remain

Market indicators continue to paint a mixed picture, and our neutral outlook has come down to price supports holding on the broad global indexes, including $54 on MSCI ACWI ex-US (ACWX-US), $76.50 on MSCI EAFE (EFA-US), and $99 on MSCI ACWI (ACWI-US). These support levels, which have held for the past 8+ months, are now breaking which tilts our stance to bearish at the index level as long as the aforementioned indexes remain below their previous support levels. The potential exists for false breakdowns, and we discuss more on that below. We still see the EURO STOXX 50 and Japan's TOPIX as holding above support, while the Hang Seng and Brazil's Bovespa appear to be bottoming, none of which paint a bearish picture. Therefore, despite being bearish on the broad global indexes, we continue to see select areas that are attractive (namely cyclical value and defensive Sectors) and we expect markets to remain mixed.

Broad Global Indexes. Key support levels that we have been focusing on for 8+ months are breaking on the broad global indexes. Important support levels that are breaking include $54 on MSCI ACWI ex-US (ACWX-US), $76.50 on MSCI EAFE (EFA-US), and $99 on MSCI ACWI (ACWI-US), and we are bearish on these indexes as long as they remain below these levels; if prices can reclaim these levels, it would signal false breakdowns and it would be a buy signal... see charts below.
Many Countries & Sectors are NOT Breaking Down. There continues to be reason for optimism on a country-and Sector-specific basis. Hong Kong's Hang Seng and Brazil's Bovespa display bullish inflections and appear to be bottoming, while Japan's TOPIX remains above 1870 and the DXJ-US is above $58.50, and the EURO STOXX 50 remains above long-term base support at 3875 and price is holding above 9-month uptrend support. From a Sector standpoint, cyclical value (Energy, Financials, Materials, & Industrials) and defensives (e.g., Consumer Staples & Utilities) remain attractive and is where we want to be focused... see page 2.
Actionable Themes: Energy & Defensives. The past two weeks we have highlighted cyclical value Sectors (Energy, Financials, Materials, & Industrials) which remain attractive. Still, we are highlighting Energy yet again because it is easily our favorite Sector. Additionally, defensive Sectors including Consumer Staples and Utilities display bullish RS inflections and we highlight several buy candidates.... see pages 3-14.