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Vermilion Macro Vision: Sector Synopsis

TRATEGY



Over the past month we have slowly been inching toward an outright bullish outlook as one area after another began breaking out to new YTD highs, giving us signals that the “mixed market environment” was coming to an end. In chronological order, we've had breakouts in Energy (XOP), Financials/banks (XLF, KRE), mid-caps (IJH), equal-weighted Discretionary (RCD), PHLX Semiconductors (SOXX), and the equal-weighted Transportation Sector (XTN). Additionally, we finally received the confirmation we needed last week in the form of breakouts in the Russell 2000 index (IWM) and Industrials (XLI). Considering all of these breakouts along with market dynamics that remain largely bullish, we believe we have officially entered a broad-based bull market. Below we summarize the basis for our bullish outlook.



Many Reasons to Be Bullish: (1) Small-caps are starting to outperform relative to large-caps, and the Russell 2000 index displays a major breakout above 8-month resistance at $234.50. (2) All cyclical Sectors are breaking out to new YTD highs and/or display bullish price inflections (including the areas noted in the opening paragraph, to name a few). (3) Not one S&P 500 Sector is violating an important support level. (4) High yield spreads have leveled-out and are below 355 bps. (5) Defensive Sectors/areas including Utilities (XLU), Consumer Staples (XLP), Health Care (XLV), pharmaceuticals (PPH), gold (GLD), and Telecommunications (IYZ) are all hitting new relative strength (RS) lows. (6) Cyclical Sectors are outperforming relative to defensives, with both the cap- and equal-weighted Discretionary vs. Staples ratios hitting new multi-year highs. (7) The US dollar is below critical long-term resistance at $94.70-$95. (8) The 10-year Treasury yield is holding above support in the 1.38%-1.45% zone. (9) Broad commodities (Bloomberg Commodity index) remain bullish, WTI crude oil prices display a big breakout, and Dr. Copper displays a bullish reversal. (10) Breadth is healthy as measured by advance/decline (A/D) lines on major indexes such as the Russell 3000, Russell Micro Caps, and Nasdaq Composite. (11) Europe's STOXX 50 is hitting highs last seen in 2008, and Japan's TOPIX is building a bullish base and is at 21-year highs. All of the aforementioned items suggest risk appetites are strong/improving, and they are all consistent with historical bull markets. As long as these trends remain in place, we have no choice but to be bullish on the broad equity market.



Bottom Line: As long as the above “reasons to be bullish” remain true and as long as the below support levels hold on the Russell 2000 and S&P 500, we are bullish and we see pullbacks as buying opportunities. Key support levels we are watching include $230-$234.50 on the Russell 2000 (IWM) and 4545 on the S&P 500.