Tactical Playbook. Waverly Advisors, LLC. Adam Grimes Chief Investment Officer

Transcription

1 Tactical Playbook Week of 27 March 2017 Market context and trade ideas for the active trader US stocks are consolidating against the bottom of a daily bull flag, in patterns that suggest at least another attempted selloff. This selloff, if it develops, could lead to a sharp decline, but this occurs within a still-very-bullish higher timeframe context. Short-term traders may wish to pursue shorts, but keep tight stops and take profits proactively on these shorts. Longer-term traders and investors have no cause for concern; this decline will likely just be a correction in the still-overextended weekly charts of major indexes. Though US stocks were weak over the past week, ex-us stocks were generally strong. This is still a very bullish environment for stocks. We have moved to a market weight on Financial stocks this week. Crude oil is now pointing toward the possibility of a significant decline. Consider impact on related stocks, and watch distillates for clearer technical signals than crude itself. The US Dollar is also edging toward a key support level, after failing to rally in a bullish setup over recent weeks. Expect that the USD could decline sharply in coming weeks. No clear edge to precious metals at this time. Bond futures are in the middle of a longer-term range; wait for better technical clarity before initiating any trades or positions. Major Market Direction and Bias Market Short term (< 1 month) Int. Term (2-12 months) USA Up Europe Up Asia Up Up Trsry Futs Dollar Down Pound Down Euro Down Yen Gold Crude Down Last Week s Performance Market Return σspike Kpos Trend Volatility USA (1.44%) (1.1σ) 82 Bull Quiet Europe 0.00% 0.0σ 93 Bull Quiet Asia (0.50%) (0.3σ) 104 Bull Quiet Europe 0.00% 0.0σ 93 Bull Quiet Emerging 0.81% 0.4σ 101 Bull Quiet 30 Yr Tr 1.79% 1.2σ 48 Bear/Neutral Quiet Euro 0.56% 0.5σ 60 Bear/Neutral Quiet Yen (1.16%) (0.7σ) 42 Bull/Neutral Normal Gold 1.49% 0.7σ 64 Bear/Neutral Quiet Crude (2.72%) (0.6σ) 17 Bear Quiet Waverly Advisors, LLC Adam Grimes Chief Investment Officer grimes@waverlyadvisors.com info@waverlyadvisors.com Contact Sales: (607) sales@waverlyadvisors.com Contents Market Insight 2 U.S. Equities 3 Equity Indexes: Short-Term 5 U.S. Equity Sectors 6 U.S. Individual Stocks 7 Volatility & Risk 9 Global Stocks 10 Rates & FX 11 Commodities 13 Macroeconomics 15 Discretionary Trade Ideas 16 Relative Strength Rankings 17 Equity Screens & Models 18 Disclaimers & Contact Waverly Advisors, LLC. All Rights Reserved. Please review disclosures on the final page of this report.

2 Market Insight US stocks are flashing some warning signs, at least in the short term, and a number of directional biases in other markets have shifted a bit. This week, let s take a look at what has and what has not changed, and consider the general concept of when and how short-term movements can change long-term biases. Global stocks We still think the picture is rosy for global stocks, at moderately long (3+ month) time horizons. Last week s decline in the US seemed to center around political concerns, and we may see further political shocks in coming weeks. Major European indexes shook off the US weakness, and most Asian/Pacific indexes continued in their bullish modes, apparently unconcerned about volatility and shifting character coming in the US. We read the ex-us action as being strongly bullish and as confirmation of underlying bullish sentiment. Of course, it is possible that further US weakness could act as a contagion for global stocks, but we can imagine no stronger vote of confidence than we ve seen in the past week. For now, the longer-term picture for stocks is strongly bullish, but be on guard for further short-term weakness. Note that a quick recovery from US stocks could be a catalyst that drives all stock Tactical Playbook, Week of 27 March 2017 markets higher, and would erase the short-term bearish potential in US markets. In fact, this has been the standard mode for US stocks over the past 2-3 years: any bearish setup finds ready buyers and short-term bears do not even get a chance to enter positions. A number of factors suggest that this time could be different, but do not sell into strength. Followthrough and action over the next two weeks will clarify the technical situation, and will give us further insight into longer-term trend integrity. Rates & volatility The US Dollar may be front and center soon, as it edges toward a level that could generate a critical technical decline. Though this is a failure of a longer-term bull flag, two points to consider: a weaker USD is probably strongly bullish for the US economy and could have favorable impacts on exports and manufacturing. Second, technical patterns do fail, as any pattern simply gives a tilt to the probabilities of the markets involved. Bond futures show no clear patterns, as the yield curve is stabilizing with some flattening at higher levels. We have cautioned many times about naïve assumptions that higher rates equal declines in bond futures the situation is far more complex. Volatility in many assets has edged up from historic lows, but is still quite low. From these low volatility environments, we often see very large directional moves. Volatility is a risk factor but also motivation for many kinds of trade setups in many markets. Commodities We may finally be edging toward some action here: crude oil is pressing toward a critical support level, and energy sector stocks also appear set for weakness. Crude has significant downside potential from current levels. Precious metals do not show any clear short-term bias, but are still working through what is likely a longer-term trend change to an uptrend. Watch grains for action in coming weeks as we will likely see some seasonal volatility come into these markets. 2

3 U.S. Equities An important short-term shift: we now have bearish setups in US stock indexes. Be clear that these are short-term trades, likely lasting less than 2 weeks, and forecasting initial declines of less than 5% from current levels. Though longer-term bullish patterns are unaffected (in fact, this decline could be very healthy for the longer-term trend), this move could be challenging for shorter-term traders, raise some emotional challenges for investors who are not, in recent quarters, used to stocks going down, and could present good opportunity for nimble swing traders. Last week s low is a critical reference for this move. Should the market rally strongly from this level, the bearish potential will be significantly eroded. We move to a market weight on Financials this week. Tactical Playbook, Week of 27 March

4 Tactical Playbook, Week of 27 March 2017 U.S. Equities (continued) U.S. Large Cap Sector Weighting Sector Assessment Weight LastChg RelPerf Technology Over 1/6/17 4.2% Financials To mkt Market 3/24/17 - Hcare Market 7/1/16 - Discret'nary Market 9/2/16 - Industrials Over 1/20/17-1.5% Staples Market 10/10/14 - Energy Caution Market 9/12/14 - Utilities Market 10/10/14 - Materials Market 2/17/17-4

5 Tactical Playbook, Week of 27 March 2017 Equity Indexes: Short-Term A very bearish setup on daily charts can set up some strong intraday trends and many opportunities for intraday traders. Use the wide range of the last half of last week as a breakout trigger, entering long/short above/below the range. Breakout mode early this week, with a directional bias to the downside. Gap & Risk Analysis Market ATR 20 Avg Gap % Gaps S&P % R2K % MiniDow % 5

6 U.S. Equity Sectors We have moved to a market weight on Financial stocks, booking a -3.2% underperformance during the period we held the overweight. (This loss was more than offset by Tech s +4.2% outperformance.) Weakness in Financials (and a flattening yield curve) point to more trouble ahead for this sector. In addition, expect that any political concerns (US) will be magnified by this sector. In addition to directional risk, heavy Financial exposure brings extreme volatility risk into the portfolio. Energy is set for a period of continued weakness. We hold overweights in, Technology and Industrials. Tactical Playbook, Week of 27 March 2017 Sector & Energy Industrials Technology Materials Discretionary Fin Svcs Real Estate Staples Healthcare Utilities COG, KMI, WMB, NOV, PXD, MPC HES!, CHK, NFX, MUR, MRO, APA CSX, EFX, ALLE, FBHS, SWK, ROK TDG!*, PBI!, AYI!, AAL, JBHT!*, DAL MU!*, ATVI, SYMC, ADBE!*, SWKS, KLAC! FTR!*, FSLR!*, CTL, QCOM, ACN!, CSRA ALB, IFF, SHW, OI, FMC, AVY AA, VMC, APD, SEE, NUE, MLM WYNN!, PHM, HAS, PVH!*, TIF!*, PCLN TGT!*, KSS, M!*, LB!*, URBN, UA MCO, SPGI, PGR, MMC, LUK, AJG NAVI, SYF!, FITB!, COF!*, LNC!, TROW! KIM, GGP, SPG, VNO!, MAC, FRT AMT!*, EQIX, CCI!, AVB, HCN, WY PM, MJN!, CLX, MNST, EL, RAI!* KR, WFM, WBA, GIS, CPB, MDLZ ILMN, CERN!, ISRG!, VRTX, BAX, AGN ENDP, MNK!*, PRGO(E)!, ESRX!, GILD, BMY NRG, CNP, EIX, PCG!, XEL!, NEE SCG, AES, FE, EXC, SO, PEG Key:! = overextension,!* = extreme overextension 6

7 U.S. Individual Stocks Last week appears to position markets for another decline. Short term traders should focus on potential shorts and on managing risk in longs. Remember, the bearish setup could fail, and, if it does, it will likely do so through a dramatic rally. Continue to look for best long trades. Longer-term (2+ months), bullish patterns are still strong and intact. The broad market is likely to be more important than individual stock selection. Best short setups are stocks which are near critical lows and which were not able to rally with the market over the past few months. Best long setups are bull flags which have held together well while the market has backed away from highs. Should the market decline further, look for stocks that do not participate in the selloff as good long candidates. Tactical Playbook, Week of 27 March 2017 Example Trade Entries Buy SPY on a breakout above against an initial stop around Sell (short) SPY on a breakdown below against an initial stop around (These two trades can be executed on a stop and reverse basis.) Buy DUK on a breakout above against an initial stop around Sell (short) CPB on a breakdown below against an initial stop around Sell (short) PE on a breakdown below against an initial stop around Key: Near (yellow) and Far (red) stops for daily bars. Colored band beneath the chart indicates trend condition (bright green to bright red = strong bull to strong bear trend.) 7

8 U.S. Individual Stocks (continued) Tactical Playbook, Week of 27 March

9 Tactical Playbook, Week of 27 March 2017 Volatility & Risk Forecast Volatility Average realized volatility over the next month is expected to be 11.7% Volatility is currently roughly in-line with the forecast. Current Volatility (and one year review) 20HVol 60HVol 120HVol 252HVol VIX Now 11.6% 8.2% 8.4% 10.3% 13.0% Max (1 yr) 20.3% 18.7% 16.8% 17.2% 25.8% Min (1 yr) 4.6% 6.3% 7.9% 10.0% 10.6% Percentile 83.2% 15.1% 5.1% 7.1% 45.4% Avg (5 yr) 12.0% 12.4% 12.6% 12.9% 15.1% SPX Price Forecast (using volatility derived from VIX.) 1 week 1 month 2 month 3 month 6 month 1 year 95%+ 2, , , , , , mean 2, , , , , , %- 2, , , , , ,

10 Tactical Playbook, Week of 27 March 2017 Global Stocks Global stocks, ex-us, were generally strong last week, and did not participate in the US-led selloff. Europe continues to point higher in a stable trend, with no tradable inflections and patterns. In some cases, a market simply going higher is a pattern in itself. Many Asia/Pacific economies continue to set up very good trades to the long side. These indexes (e.g., South Korea, Taiwan, Singapore) move between shortterm overbought conditions and moderate corrections of those overextensions. Expect that the US may generate some more volatility in coming weeks, but the longer-term picture is unchanged: We still think the best potential for leadership over longer timeframes (2+ quarters) lies in the US. 10

11 Tactical Playbook, Week of 27 March 2017 Rates & FX With ongoing rate hikes seeming increasingly likely, the market is adjusting to a new normal. Bond futures have rallied, perhaps driven by some flattening at the short end of the curve. We do not see a clear directional trade for US bond futures at this time. Many Eurobond futures point to a short-term selloff (price in EUR.) The US Dollar now appears to be edging toward a significant decline/selloff. Watch a handful of currency setups this week, driven primarily by moves in the EUR, NZD, and AUD. 11

12 Rates & FX (continued) Tactical Playbook, Week of 27 March

13 Tactical Playbook, Week of 27 March 2017 Commodities Metals: Precious metals have no clear directional bias over short and intermediate-term timeframes. Energy: Crude oil continues to position for a further decline. Distillates may provide clearer technical information than crude. Foods & Softs: A number of instructive patterns in these markets: live cattle is putting together a stunning rally, cocoa is grinding through a trend change, and grains may be ready to wake up from their winter slumber. Watch for good trades to set up in coming weeks. 13

14 Commodities (continued) Tactical Playbook, Week of 27 March

15 Tactical Playbook, Week of 27 March 2017 Macroeconomics Still watching manufacturing and export data closely. Weaker dollar could certainly buoy exports, but as long as this sector lags, the economy is likely to lag. Recent manufacturing data is mixed, pointing toward some potential strength. Jobs data is showing some more noise, but this is to be expected at very low levels. (From a common sense standpoint, historically low unemployment numbers cannot trend lower indefinitely.) In terms of price action, watch the US Dollar (leaning short-term bearish) and crude oil (possibly setting up a dramatic decline); both of these could have far-reaching impact on a wide range of assets. This week, watch Dallas Fed on Monday, GDP on Thursday, and Personal Income and Outlays on Friday. (Consumer Sentiment and Confidence numbers are due on Tuesday and Friday, but we do not watch these closely.) 15

16 Tactical Playbook, Week of 27 March 2017 Discretionary Trade Ideas Date In L/S Size Contract Type Price In InitStop Last Target Stop StopATR CurrentRisk Open% Open%R Total P&L 3/6/17 S 1/2 Sugar (May) PB N/A Profit 7.4% 1.4x 1.2x 3/17/17 L Full Cocoa (May) Anti 2,089 1,933 2,133 2,245 2, % 2.1% 0.3x 0.3x 3/21/17 S Full Crude Oil (May) PB % 1.1% 0.2x 0.2x 3/21/17 S Full USDCHF PB % 0.3% 0.2x 0.2x Key: I = Intermediate-term (otherwise it is short-term), PB = Pullback, A = Anti, FT = Failure Test, BO = Breakout Commentary We tightened the stop on the cocoa, crude oil, and USDCHF trades. Potential entries Sell S&P 500 ( Jun) 2,330.00, against an initial stop around 2, Sell USDCAD , against an initial stop around Buy EURNZD , against an initial stop around *All breakout entries should only be held if confirmed by a strong/weak close (for a buy/sell) on the day of trade entry. Note: These are a distillation of our quantitative and discretionary work. In a sense, they are specific trade examples of our bigger picture tactical themes. Please contact us for further information on our discretionary and systematic trading approaches. 16

17 Relative Strength Rankings Tactical Playbook, Week of 27 March 2017 International Now Chg VRat US Sectors (SP1500) Now Chg VRat US Industries (Top) Now Chg VRat US Industries (Bottom) Now Chg VRat Brazil Information Tech Comps & Peripherals Electric Utilities S Africa Financials Internet & Catalog Ret HCare Prov & Svcs Taiwan Materials Semis & Semi Equip Multi-Utilities Mexico Consumer Discretionary Tobacco Water Utilities Nthrlands Industrials Commercial Banks Building Products S Korea Utilities Elec Equip & Cmpnnts Pharmaceuticals Germany Health Care Media Containers & Packaging France Consumer Staples Auto Components Beverages Hong Kong Telcom Svcs Software Metals & Mining Japan Energy Trading Cos & Dists Construction Materials Sweden US Industry Groups Now Chg VRat Div Financial Svcs Specialty Retail Singapore Tech Hardware & Equip Aerospace & Defence Construction & Eng Thailand Semis & Semis Equip Communications Equip REITs Russia (NDQ OMX 15) Banks Machinery Professional Svcs Australia Media Div Consumer Svcs Food Products Switzerland Consumer Svcs Road & Rail Industrial Conglomerates Finland Software & Svcs HCare Equip & Supply Thrifts & Mrtg Finace S&P 500 Index Diversified Financials Htls Rests & Leisure Leisure Equip & Prds Indonesia Health Care Equip & Svcs Ind Pwr Prod & Trdrs BioTech Israel Insurance Gas Utilities Air Freight & Logistics UK Capital Goods Chemicals Energy Equip & Svcs Greece Materials Capital Markets Automobiles Canada Food Beverage & Tobacco Life Scis Tools & Svcs Personal Products Arabia Titans Utilities Internet Soft &Svcs Div Telcom Svcs Phlippnes Transportation Household Durables Marine India (SP India 10) Household & Prsnl Prod IT Svcs Txtils, Apprl & Lux Gds US Mkt Cap Indexes Now Chg VRat Retailing Consumer Finance Oil, Gas&Consmble Fuels US Growth Commercial & Prof Svcs Health Care Tech Food & Staples Ret S&P 100 Index Pharma, Biotech & Life Sci Insurance Distributors S&P 500 Index Automobiles & Compnts Airlines Wireless Telcom Svcs DJ Wilshire 5000 Comp Cons Durables & Apparel Electrical Equip Multiline Retail US Value Real Estate Comm Svcs & Supplies Russell 2000 Index Telcom Svcs Paper & Forest Products S&P SmallCap 600 Index Energy Household Products Russell MicroCap Index

18 Tactical Playbook, Week of 27 March 2017 Equity Screens & Models Equity Screens, Trading Models, and Systems are available in the Excel attachment to this . Summary of Equity Screens: Big Movers: highlights stocks that have had large volatility-adjusted moves the previous trading day. Historical Movers: A look at the big movers screen, highlighting the largest moves over the past 10 trading days. This is a tool for finding pullbacks and for measuring market reaction to these large moves. In Play: Highlights stocks that are trading with exceptional volume and activity, relative to their own longer-term trading history. Consecutive Closes: an overbough/oversold screen based on consecutive closes in one direction. Extension: a long/short model for stocks, with a focused edge for short-term trades. Pullback Buy & Pullback Sell: Long/short screens highlighting stocks that are potential candidates for pullback trades. Typical use of this screen would then involve a look at the names on this list, choosing the best patterns and examples. RS Strong: highlights the strongest relative strength stocks in the market, based on a relatively short-term, volatility-adjusted measure of relative strength. 18

19 Disclaimers & Contact Tactical Playbook, Week of 27 March 2017 Waverly Advisors, LLC 5607 Pittsford-Palmyra Rd. #1034 Pittsford, NY (607) or The Tactical Playbook ( The Report ) is a newsletter published by Waverly Advisors LLC. Receipt of The Report is subject to terms of service: Waverly Advisors uses reasonable care in preparing and publishing The Report, however, Waverly Advisors does not guarantee The Report s accuracy or completeness. Opinions expressed in The Report are subject to change without notice. The Report, and ( The Website ) and all information provided therein should not be construed as a request to engage in any transaction involving the purchase or sale of securities, futures contracts, commodities, currencies and/or options thereon. The risk of loss in trading securities, futures contracts, commodities, currencies and/or options thereon is substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition and discuss with their financial advisor(s). The information provided in The Report is not designed to replace your own decision-making processes. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Copyright Waverly Advisors, LLC All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Waverly Advisors, LLC. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Waverly Advisors, LLC. This report is limited for the sole use of clients of Waverly Advisors, LLC. Any redistribution of this report or of its content will violate the terms of service. 19