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Vermilion Macro Vision: Sector Synopsis

TRATEGY



In our May 10 U.S. Macro Vision, we discussed our bearish outlook, noting the path of least resistance remained lower, and that the S&P 500's breakdown from its head-and-shoulders topping pattern implied a measured move price target of anywhere in the 3500-3695 range. While we remain bearish and we continue to believe that the path of least resistance is lower, the S&P 500 has already clipped our initial downside objective, hitting a low of 3636 in mid-June. Short-term resistance levels we are watching include, 3900 on the S&P 500, $297 on the Nasdaq 100 (QQQ), and $178 on the Russell 2000 (IWM); breaks above these levels would indicate a more meaningful bear market bounce is underway.



Ultimately, we continue to believe that this bear market is being fueled by (1) the rising U.S. dollar (DXY), (2) rising 10-yr Treasury yield, and (3) the move higher in WTI crude oil. In order for the broad equity market to bottom, at least two of these three culprits will need to form tops and start moving lower. Until then, the major stock indexes will have trouble finding a reliable bottom, and we view rallies as selling opportunities. Specifically, we will need to see sustained breakdowns below $104 on the DXY, 2.70% on the 10-yr Treasury yield, and $93 on WTI crude oil, in order to have confidence that they are topping. Until these levels are broken, our expectation is for strength in these three culprits to continue.



Absent topping patterns in at least two of these three culprits, we see the bear market continuing.



On the following pages we summarize the basis for our bearish outlook.