Vermilion Macro Vision: Sector Synopsis
STRATEGYIn last week's Compass (Sept. 13), we noted that key support levels could be tested again following the release of a hotter-than-expected August CPI report. Supports discussed in that report included 3900 on the S&P 500, $293 on the Nasdaq 100 (QQQ), and $177-178 on the Russell 2000 (IWM). Supports on the S&P 500 and QQQ failed to hold, which opens the door for a test of YTD lows – or worse, a break to new lows and a continuation of the bear market. At the same time, the Russell 2000 (IWM) has continued to hold above support at $177, and market dynamics remain mixed with plenty for both bulls and bears to point to as supportive to their case. On the “reasons to be bullish” side, we have Consumer Discretionary (XLY, RCD) and Financials/banks (XLF, KRE, IAI) hitting multi-month RS highs, commodity prices deteriorating, and positive breadth divergences. On the “reasons to be bearish” side, we have the continued rise of the U.S. dollar and Treasury yields, Fed tightening, elevated high yield spreads, and an inverted yield curve. Due to these mixed dynamics, we remain neutral overall as we cannot rule out the possibility that market indexes are going through a drawn-out bottoming process.
We believe the case for confirmation of a true market bottom continues to boil down to a positive resolution to the same three culprits that we have discussed for months: the U.S. dollar (DXY), commodities/crude oil, and the 10-yr Treasury yield. We need to see breakdowns from topping patterns in at least two of these three for the market indexes to establish a reliable bottom – none of which we have seen thus far. Broad commodities (DJP) and the 10-year Treasury yield have not made new highs since June, a sign that they could be forming tops (but that only breaks below $37 on DJP and 2.5-2.7% on the 10-year Treasury yield would confirm tops). Additionally, the DXY continues to find support at its 50-day MA; only a break below the 50-day MA (currently $107.75) would lead us to believe it is topping.
Absent confirmed tops in at least two of these three culprits, we cannot be bullish on the broad equity market.
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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