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Vermilion Macro Vision: Sector Synopsis

STRATEGY



Since the middle of April we have discussed the mounting evidence that suggested a test of the lows, and possibly a break to new lows, was increasingly likely. Now that the S&P 500, Nasdaq 100 (QQQ), and Russell 2000 (IWM) are all breaking to new lows, the evidence continues to suggest we have more downside to go. As we discuss in the following pages, market dynamics remain almost exclusively bearish. Additionally, the S&P 500 is breaking down from a head-and-shoulders topping pattern; depending on what you choose for the neckline, this breakdown implies a measured move price target of anywhere in the 3500-3695 range. Trying to predict the exact level where the broad market will bottom is a fool's errand, but the important thing to take away is that the path of least resistance remains lower. An oversold rally would not be surprising considering extreme bearish sentiment, but as of now, we view rallies as selling opportunities. As a result, we are bearish at the index level.

We are watching for the following developments in order to give us confidence that the bottom is in:

We now have three 90%+ NYSE downside volume days along with numerous 80%+ downside days during the current correction. As we stated following the first 90%+ downside volume day, there can certainly be more 80-90%+ downside days that take the indexes much lower. Ultimately, we will need to see back-to-back 80%+ upside volume days or one 90%+ upside volume day (i.e., panic buying) on the NYSE in order to have confidence that a major bottom is in place.
Bullish price inflections on the major indexes; right now, the major averages are all breaking down and are trading within downtrends.
RS uptrend violations for Consumer Staples (XLP) and Utilities (XLU).
Absent these requirements, we expect the market to get worse before it gets better.

While we wait for the broad market to bottom, we continue to recommend hiding out in the defensive Sectors (Consumer Staples, Utilities, and Health Care) and the commodity Sectors (Energy and Materials), all of which remain leadership.

Below we summarize the basis for our bearish outlook.