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Vermilion Macro Vision: Sector Synopsis

STRATEGY



Considering the absence of breakdowns for the major indexes and for individual Sectors, along with the Fed covering investors' backs, we continue to have a bullish outlook and we believe that the path of least resistance remains higher. In the broad scheme of things this is by no means a “perfect” bull market, but the market rarely presents the perfect goldilocks environment as there is almost always something to be concerned about. The way we see it, the positives continue to heavily outweigh the negatives.

What supports this bullish outlook? (1) Not one Sector or major index is breaking below a key support level, (2) the US dollar is showing signs of rolling over, (3) RS for emerging market equities (vs S&P 500) is bullishly inflecting topside a multi-year downtrend, (4) defensives Sectors such as Consumer Staples, Utilities, and Real Estate are all at or near 52-week RS lows, (5) high yield spreads have been making lower highs and lower lows since the March peak, (6) breadth remains constructive, and (7) commodities are bullishly inflecting. These are all signs of a risk-on environment, and one where a bullish outlook is appropriate.

What are the risks to our bullish outlook? First of all, any number of the bullish items listed above could take a turn for the worse, which would negatively affect our outlook. Second, Treasury yields are testing recent lows which we believe is the bond market's way of telling us we are not yet out of the woods. A break below 0.57% on the 10-year would likely be problematic for the equity market. Third, the Financial and Energy Sectors continue to give us reason for pause as both are testing key price and RS support levels. A failure of these levels to hold would raise concerns for the broad market. And last but not least, we view the widening performance gap in favor of growth over value as a concern for the broad market, and we would like to see this performance gap close. Markets are strongest when they are broad and weakest when they narrow to just a handful of blue-chip names. Stronger upside participation from the more economically sensitive Sectors such as Financials, Energy, Manufacturing, Transportation, and Materials would set the stage for a broad market advance.

Bottom line: As long as the S&P 500, Nasdaq 100, and Russell 2000 are above their respective intermediate-term support levels we believe a positive outlook is warranted. Support levels to watch include 2950 on the S&P 500, 9730 on the Nasdaq 100, and 1333 on the Russell 2000.