Vermilion Macro Vision: Sector Synopsis
STRATEGYSince the pullback began in August, we have pointed to longer-term support at 4300-4325 and 4165-4200 on the S&P 500 as areas that offer a more attractive entry point. 4300-4325 did break, but the 4165-4200 area has held. We also discussed in our 10/31/23 Compass how risk/reward favored buyers with key supports being tested, including 4165 on the S&P 500, $162-$163 on the Russell 2000 (IWM), and $350 on the Nasdaq 100 (QQQ). A potent rally ensued, and we discussed in our 11/7/23 Compass our belief that this was more than just another counter-trend rally, and that it is likely the start of a significant year-end rally. This belief has only been reinforced as the Nasdaq 100 (QQQ), DJI, and semiconductors (SOXX, SMH) display 3.5-month downtrend reversals – which is on top of all the other bullish multi-month reversals and false breakdowns discussed in last week's Compass (11/7/23).
Looking at the big picture, we are bullish on the S&P 500 as long as it is above 4165, as most signs point to this being a normal pullback within the ongoing bullish trend in SPX. Additional important supports that must continue to hold include $350 on the Nasdaq 100 (QQQ) and $162-$163 on the Russell 2000 (IWM).
Additional market dynamics supporting our constructive outlook include: (1) the U.S. dollar (DXY) displays a false breakout at the important $105.70-$106 level, (2) Treasury yields across the curve display multi-month uptrend violations, (3) high yield spreads are at 18-month narrows, (4) defensive Sectors including Consumer Staples (XLP) and Utilities (XLU) remain in YTD RS downtrends, (5) breadth continues to bottom-out, and (5) major non-U.S. equity indexes display bullish multi-month downtrend reversals and/or false breakdowns.
We are also making four Sector weighting changes today. We are upgrading both cap-weighted Technology (XLK) and cap-weighted Communications (XLC) to overweight. Additionally, we are downgrading both Health Care (XLV, RSPH) and Transportation (IYT, XTN) to underweight.
On the following pages we summarize the basis for our constructive 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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