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Vermilion Macro Vision: Sector Synopsis

STRATEGY



The S&P 500 has finally broken below critical support at its 50-day MA. This has been our key line in the sand for the past two months on the index; now that the S&P 500 is below it, the long-awaited 5-15% pullback has begun. We have not gotten a 5-15% pullback in the S&P 500 for over 6 months, so this weakness is certainly “due.” Of course, weakness or consolidation is nothing new, considering small-caps and value stocks topped all the way back in the March-May timeframe. Additionally, market dynamics remain mixed (i.e., not overly bullish, but not bearish either). Considering the weight of the evidence, our outlook remains neutral yet constructive overall. Key support levels we are watching include $208 on the Russell 2000 (IWM), $146 on the equal-weighted S&P 500 (RSP), $109 on the equal-weighted Nasdaq 100 (QQEW), $35 on Financials (XLF), and $136 on micro-caps (IWC); as long as these support levels hold, we see pullbacks as buying opportunities. Below we summarize the basis for our neutral yet constructive outlook.

Neutral Yet Constructive Indicators: (1) High yield spreads have leveled-out and are below 355 bps. (2) The US dollar is below 93.50. (3) Defensive Sectors display consolidating RS. (4) Key support levels are holding, including: $208 on the Russell 2000 (IWM), $146 on the equal-weighted S&P 500 (RSP), $109 on the equal-weighted Nasdaq 100 (QQEW), $35 on Financials (XLF), and $136 on micro-caps (IWC). (5) The 10-year Treasury yield is consolidating between 1.13% support and 1.38-1.45% resistance. (6) Not one S&P 500 Sector is breaking down below long-term support. (7) The Bloomberg Commodity index (DJP) and WTI crude oil are above key supports. (8) Europe's STOXX 50 is holding above 3875 support and Japan's TOPIX is breaking out to 31-year highs. Until the above begin to violate key levels we are cannot be full-on bearish.

Primary Concerns: (1) Small-caps are underperforming. (2) Breadth remains unhealthy. (3) China (MCHI) and MSCI Emerging Markets (EEM) display bearish price and RS trends. These items are all consistent with an equity market that is under pressure, but are not enough for us to be bearish. We will need more of the “neutral yet constructive indicators” highlighted above to take a turn for the worse in order to move to a more bearish stance.

Bottom Line: As long as the following support levels hold, we see pullbacks as buying opportunities. Key support levels we are watching include $208 on the Russell 2000 (IWM), $146 on the equal-weighted S&P 500 (RSP), $109 on the equal-weighted Nasdaq 100 (QQEW), $35 on Financials (XLF), and $136 on micro-caps (IWC).