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Vermilion Macro Vision: Sector Synopsis

STRATEGY

Large-cap indexes (S&P 500 and Nasdaq 100) remain bullish, hitting new all-time highs last week while continuing to find short-term support at their respective 20-day MAs. Mid-caps (S&P 400, Russell Mid-Cap) started another leg higher in February, following breakouts from 2-month consolidations. Small-caps (Russell 2000) are unsurprisingly following in the footsteps of large- and mid-caps, and are the latest to break out from their 2.5-month consolidations/high bases. The number of risk-on signals continues to grow, while risk-off signals remain virtually non-existent. This is a hallmark of bull markets; we will be sure to point it out when this dynamic starts to change. In the meantime, we want to continue riding this bull market higher, and our bullish outlook (since early November 2023) remains intact. We will need to see the S&P 500 and Nasdaq 100 (QQQ) close below their 20-day MAs for 2-3 days in order to get more cautious, though even that would likely set up another buying opportunity. In addition to the 20-day MA, we also see short-term support at 5040-5050 on SPX; if the 20-day MA and 5040 were to break, there are many other potential supports before getting to major support at 4800.

Aside from large-, mid-, small-, and micro-cap indexes being bullish, additional market dynamics supporting our constructive outlook include: (1) 10- and 30-year Treasury yields remain below major resistances of 4.35% and 4.50%, respectively. (2) The U.S. dollar (DXY) remains below the important $105.70-$106 2+ year resistance level, and also below shorter-term resistance at $104.70. (3) High yield spreads are at 2-year narrows and are below the critical 430bps level. (4) Defensive Sectors including Consumer Staples (XLP) and Utilities (XLU) remain in long-term RS downtrends, and they are near 20+ year RS lows. (5) Breadth remains healthy. (6) Gold is breaking out to all-time highs above multi-year resistance at $2088-2090. (7) Bitcoin is breaking out to all-time highs above $69,180. And (8) major non-U.S. equity indexes continue to advance following bullish inflections in October/November 2023. These risk-on signals are all reasons that we remain bullish on U.S. equities.

One thing we are watching closely as a potential concern are the high volume bearish 1-day reversals within many leading semiconductor names, notably NVDA, AVGO, AMD, TSM, and also the primary semiconductor ETFs, SMH and SOXX. This is of particular interest because these are the names that are leading this bull market. For long-term investors, there is not much to worry about currently. While it is possible that this could be the start of some backing-and-filling and a consolidation phase in the weeks/months ahead, we would view that as healthy; semiconductors are very extended, and a rotation into other lagging areas of the market is what helps bull markets thrive. It is only if the SMH and SOXX break down from a consolidation phase that we would turn bearish. Until that happens, we see no reason for semiconductors to lose their long-term leadership status. We will continue to monitor closely. Short-term support to watch on the SMH ETF is at $212/20-day MA and $206.50; as long as these supports hold, the short-term trend remains bullish.

Below we summarize the basis for our constructive outlook.