Vermilion Macro Vision: Sector Synopsis
As discussed in last week's Compass (January 10), we see the market indexes as consolidating within broad horizontal trading ranges, and we expect these trading ranges to continue for months, and quite possibly for the entirety of 2023. We see the top-end of the range at 4100-4165 on the S&P 500, while the bottom-end is at the 2022 lows (3490). In our view, reducing risk near resistance and adding risk near support will be key to outperforming in 2023 (alongside Sector/stock selection). With the S&P 500 currently testing its 200-day MA and approaching the 4100 level, we recommend getting more defensive. Additionally, it is not just the S&P 500 that is testing resistance; the Russell 1000 (IWB) is testing its 200-day MA and 1-year downtrend, the Russell 2000 (IWM) is testing $190 resistance, the Dow Jones Industrial Average (DJI) is testing 34,280 resistance, the equal-weighted S&P 500 (RSP) is testing $148-151 resistance, Financials (XLF) are testing $36, and equal-weighted Consumer Discretionary (RCD) is testing $129 resistance. As long as these important areas remain below the aforementioned resistance levels, we believe upside is limited.Further evidence supporting our belief that upside is limited includes intact 1+ year RS uptrends on defensive Sectors (Consumer Staples - XLP, Utilities - XLU, and Health Care - XLV) and the 10-year Treasury yield holding above 3.4%-3.5% support. A new bull market is unlikely if defensives continue to outperform and yields remain elevated.
With that said, we do see several positive signals that prevents us from getting too bearish, including: (1) the U.S. dollar (DXY) continuing to show signs of a major top, most recently breaking below 5-year support at $103, (2) cyclical value Sectors including Industrials (XLI), Energy (XLE), equal-weighted Consumer Discretionary (RCD), Financials (XLF), and Materials (XLB) are all near 6+ month RS highs, (3) high yield spreads have narrowed to 5-month lows (4) breadth remains healthy, with a relatively small amount of mega-caps giving an illusion of weakness, (5) indexes within Europe and the UK are bullish (EURO STOXX 50, DAX, CAC 40, FTSE 100, etc.), and (6) EM (EEM) and China (MCHI, KWEB) are bottoming. These positive developments lead us to believe we have likely seen the lows for this bear market, both in the U.S. and abroad.
On the following pages we summarize the basis for our neutral outlook.
Vermilion Research delivers timely, actionable, and unique research inputs to professional investors. Our research strategists highlight securities which we believe are at major inflection points, based on our various proprietary technical indicators, and offer asymmetric risk/return profiles. We believe our research methodology, which is not limited by industry sector or market capitalization, enables us to deliver superior investment recommendations.
Our process begins by organizing all actively traded stocks into coherent sectors, then into logical industry groups. We then apply our proprietary relative strength tools to identify developing price trends. Once attractive trends are identified within a selected sectors or groups, we screen for individual stocks which we believe offer the best risk/reward profile. Vermilion offers U.S. and global equity market research products. Vermilion’s research team, which has received numerous awards and accolades, has a combined 70 year of experience in the analysis of investment securities.
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