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Vermilion Macro Vision: Sector Synopsis

In our 1/26/21 Compass we highlighted the fact that our weight of the evidence approach led us to being slightly less bullish than we have been over the past 2-3 months, citing the 10-year Treasury yield which was fast-approaching the key 0.97-1.00% support level, RS deterioration in cyclical value Sectors (Manufacturing, Transportation, Financials, etc.), and some mild RS improvement for certain defensive areas of the market (REITs, pharma, and Utilities). Aside from some short-term price deterioration for the major averages and select Sectors, not much has changed in terms of market dynamics since our last Compass. We currently see the broad market as going through a consolidation phase, however as long as the S&P 500 holds above 3550 and market dynamics continue to lean bullish, we view any weakness as a buying opportunity. Below we summarize the basis for our bullish outlook.

What supports our bullish intermediate-term outlook? (1) The S&P 500, Russell 2000, Nasdaq 100, and Dow Jones Industrial Average recently hit all-time highs and longer-term price patterns remain bullish. (2) The Russell 2000 vs. S&P 500 ratio (small- vs. large-caps) remains in an uptrend. (3) Defensive areas such as Consumer Staples, Utilities, and Real Estate continue to make lower highs in terms of relative strength. (4) Cap- and equal-weighted Discretionary vs. Staples ratios continue to make higher lows. (5) The US dollar (DXY) remains in a downtrend and below 92 major resistance. (6) High yield spreads continue to make lower highs. (7) The 10-year Treasury yield remains in a multi-month uptrend and is above key support at 0.97-1.00%. (8) Broad commodities are devoid of bearish inflections. (9) Emerging market equities (EEM) display bullish price and RS trends. (10) Other major foreign markets such as Europe, Japan, and Hong Kong are developing positively and are holding above important support levels.

These are all signs of a risk-on environment, and one where a bullish outlook is appropriate. Still, we seeing early signs that certain dynamics are showing short-term deterioration, which is why we turned less bullish last week. If these new short-term trends persist and/or, if a majority of the bullish items above take a turn for the worse, it will likely lead to a deeper pullback for stocks.