EUR 87.67 For Business Accounts Only

Vermilion Macro Vision: Sector Synopsis

STRATEGY



Despite expectations for tightening monetary policy in the coming year, not one major average is breaking down below support and market dynamics remain largely constructive. As long as the Russell 2000 index (IWM) is above $208, the Russell Micro Caps index (IWC) is above $134, and the S&P 500 is above 4495, we cannot be bearish. As long as prices are above the aforementioned levels, we expect more consolidation and mixed markets ahead. Below we summarize the basis for our neutral yet constructive outlook.

Constructive Signals:

10- and 30-year Treasury yields are reversing topside their respective downtrends, likely kickstarting a significant move higher.
We are seeing early signs of a steepening of the yield curve as 10-year vs. 2-year Treasury yield spread widens.
High yield spreads have narrowed back below the key 355bps level.
Not one major average is breaking down below support; the Russell 2000 (IWM) remains above $208, the Russell Micro Cap index (IWC) remains above $134, the S&P 500 remains above 4495, the equal-weighted Nasdaq 100 (QQEW) remains above $109, MSCI EAFE (EFA) is above $76.50, and the MSCI ACWI ex-US (ACWX) is above $54.
Defensive areas including Treasuries (TLT) and gold (GLD) remain in relative strength (RS) downtrends.
Cyclical value Sectors such as Energy (XLE) and Financials (XLF) are hitting multi-month price and RS highs.
Broad commodities (Bloomberg Commodity index) remain above $25.75 support, the price of WTI crude is back above the major long-term $76-77 level, and Dr. Copper remains above $4.
The percentage of Russell 2000 stocks above their 50-day MAs recently hit 16.6%, hitting an oversold level that has marked two ideal buying opportunities during the current bull market; it is possible breadth has bottomed-out.
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 healthy. As long as these trends remain in place, we have no choice but to be constructive overall on the broad equity market.

Concerns:

Small-caps continue to underperform, with the Russell 2000 vs. S&P 500 ratio (small- vs. large-caps) near 15-month lows.
MSCI EM/China (EEM, MCHI) remain in price and RS downtrends.
Defensive Sectors including Staples (XLP), Utilities (XLU), and pharmaceuticals (PPH) show RS improvement.
The US dollar remains in an uptrend.
Breadth is concerning as measured by advance/decline (A/D) lines on major indexes such as the Russell 3000, Russell Micro Caps, and Nasdaq Composite.
Bottom Line: As long as the below support levels hold on the Russell 2000, S&P 500, and Russell Micro-Caps, we cannot be bearish. Key support levels we are watching include $208 on the Russell 2000 (IWM), $134 on Russell Micro Caps (IWC), and 4495 on the S&P 500.