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

Transcription

1 Tactical Playbook Week of 10 April 2017 Market context and trade ideas for the active trader US stock indexes touched the 20 period EMA every day last week, and 8 out of the past 10 trading sessions. This is indicative of a market in equilibrium, with no clear short-term edge. The daily bull flag is the most important technical structure. Watch as the market engages either the top or bottom of this range this week. (Note that these are sloping levels and will change value each day.) Last week, stocks were generally down across the globe, but nearly all moves were within +/- 1.0σ nearly all global stock markets are quiet, awaiting a catalyst for a bigger move. We need to say this clearly: do not focus on politics, headlines, or geopolitical stress. Much of the value of a disciplined technical process is in its ability to cut through the emotion and conflict around such factors. Focus on the message of the market and developing price structures. Global stocks are short-term uncertain, but still hold strongly bullish longer-term patterns. We have no adjustment to our sector biases and allocations for US investors this week. The US Dollar rallied a bit last week, but we see no convincing longer-term patterns at this time and have no clear edge. Watch US Treasury futures as they come into the top of the longer-term trading range, in a bearish monthly pattern context. Crude oil has also rallied to an important level. Watch action carefully this week. Major Market Direction and Bias Market Short term (< 1 month) Int. Term (2-12 months) USA Up Europe Up Up Asia Up Trsry Futs Dollar Pound Down Euro Down Yen Gold Crude Down Last Week s Performance Market Return σspike Kpos Trend Volatility USA (0.30%) (0.3σ) 81 Bull Quiet Europe (0.66%) (0.6σ) 84 Bull Quiet Asia (0.33%) (0.2σ) 92 Bull Quiet Europe (0.66%) (0.6σ) 84 Bull Quiet Emerging (0.05%) (0.0σ) 87 Bull Quiet 30 Yr Tr 0.44% 0.4σ 51 Bear/Neutral Quiet Euro (0.59%) (0.6σ) 36 Bear/Neutral Quiet Yen (0.32%) (0.2σ) 41 Bull/Neutral Normal Gold 0.49% 0.3σ 65 Bear/Neutral Quiet Crude 3.24% 0.9σ 51 Bear/Neutral 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 This week, let s review major directional biases in stocks, and also consider a broad, general theme: the idea of catching the second move. This is especially relevant in today s conflicted markets. Stocks, US & Global Stocks remain bullish to strongly bullish on lower timeframes, but are showing nearly no short term momentum. The chart on this page shows the S&P 500 futures with a line underneath showing a running total of the past 10 trading sessions that have touched the moving average. Two points to consider: first, we do consider this to be strong evidence of a market in relative equilibrium, especially when ranges are small and the moving average is flat. In this kind of directionless market, random walk is our best expectation, at least in the short-term and we have no clear technical bias. Second, this chart shows that 8/10 is not an exceptional count; over the course of the normal rhythm of the market, we see this level a few times each quarter. Europe is holding onto gains well, and is likely setting up for another rally. China rallied strongly over the past week, and may be set for at least a little mean reversion in the next few sessions. We are watching solid setups develop in a number of Asia/ Pacific countries, but have few good entries at this time. Tactical Playbook, Week of 10 April 2017 The second move The world of the short-term trader and long-term investor seem to be very different, but they share a few common problems. One issue that plagues market participants on all timeframes is the problem of anticipation versus being reactive. Too many traders/investors get caught up in trying to anticipate market reactions to world or political events. Of course, as we ve written in these notes before, this chain can break in a few ways: even if the prediction of the event (e.g. election) is correct, the market may not react as anticipated this is a good way to create multiple ways to lose! However, one of the secrets of successful trading/investing is that we do not have to catch the first move. Consider US stocks: if we were repositioning every day trying to catch moves up or down, it would be exhausting and expensive. (Many traders do just this!) If we realize that markets tend to have a move, then a rest, and then another move in the same direction, we realize something profound: we do not have to catch the first move. The second move is the high-probability move, and benefits from our being able to understand market tone due to technical action around the first strong thrust and the following consolidation. When we realize this, much of the emotion associated with daily fluctuations goes away, and we can focus on higher-level market structures that may give clearer signals. Good examples of this concept at play can be found in stocks (tight daily range), crude oil (which has recently rallied into a critical technical level), and Treasury futures (which have a strongly bearish monthly pattern despite daily/weekly indecision.) Watch these markets play out, and adjust your thinking to focusing on the second move on the timeframes and markets you follow. 2

3 U.S. Equities Technical structures in major indexes speak strongly, but, unfortunately, they speak strongly of indecision and of markets awaiting a catalyst! Key technical structures are 1) the bull flag on daily charts and 2) the near-complete lack of momentum, visible perhaps most clearly in the flat daily chart that has engaged the moving average eight out of the past ten trading sessions. US stocks finished the week with very small losses, but these were well within the range of random noise. This week, watch as the market works around the upper and lower ends of the bull flag; be aware that these levels will change daily. Bigger picture patterns still favor the upside for stocks. Tactical Playbook, Week of 10 April

4 Tactical Playbook, Week of 10 April 2017 U.S. Equities (continued) U.S. Large Cap Sector Weighting Sector Assessment Weight LastChg RelPerf Technology Over 1/6/17 4.0% Financials Market 3/24/17 - Hcare Market 7/1/16 - Discret'nary Over 3/31/17-0.5% Industrials Over 1/20/17-1.0% Staples Market 10/10/14 - Energy Market 9/12/14 - Utilities Market 10/10/14 - Materials Market 2/17/17-4

5 Tactical Playbook, Week of 10 April 2017 Equity Indexes: Short-Term Daily charts are tightly coiled, but do not anticipate breakouts. Intraday traders should treat each day as being primed for exceptional trending activity, but rely on action in the first hour of the day to show that it is a trending day as opposed to a mean-reverting session. Volatility compression is tight, and we begin the week on guard for substantial breakouts, but are only interested in participating outside of the reference range (see chart). Gap & Risk Analysis Market ATR 20 Avg Gap % Gaps S&P % R2K % MiniDow % 5

6 U.S. Equity Sectors We have no changes to sector biases or allocations this week. We hold overweights in Consumer Discretionary, Technology and Industrials. Correct overweights in this environment are essentially bullish bets on market direction. Be aware that heavy tilts toward sensitive or cyclical sectors (and/or corresponding overweights to defensive) may increase risk and exposure. We see warning signs in Energy, Healthcare, and Financials and look for possible continued underperformance there. Tactical Playbook, Week of 10 April 2017 Sector & Energy Industrials Technology Materials Discretionary Fin Svcs Real Estate Staples Healthcare Utilities COG, CHK, EQT, PXD, BHI, COP HES, RIG, XEC, PSX, DO, HP CSX, FBHS, EFX, PH, FTV, SWK AYI!*, RHI!, PBI, DAL, AAL, DNB SWKS!, QRVO!, MU, WDC!, ATVI, ADBE FTR, HPE!*, FSLR, AKAM!*, WU!, QCOM FMC!*, ALB, IFF, MON!, SHW, PPG AA, SEE!, BLL, CF, APD, MOS WYNN, SPLS!, CMG, DRI!, VIAB, AMZN URBN, AN!, LB, TGT, SIG, KMX MCO, LM, SPGI, LUK, AMP, PGR SYF, DFS, COF, FITB, PBCT, BBT KIM!, CBG, GGP, MAC, SPG, VNO AMT!*, WY, HCN!*, EQIX, CCI, HCP PM, MJN!*, STZ!, RAI!*, KMB, COST GIS!, CPB, CVS, HRL, SJM!*, SYY VRTX!*, CERN!, ILMN, ISRG, CNC, BAX MNK, ALXN, PRGO(E), BMY, BIIB, ENDP NRG, CNP, PCG, EIX, PNW, PPL SCG, AES, FE, EXC, SO, PEG Key:! = overextension,!* = extreme overextension 6

7 U.S. Individual Stocks With no new information from stocks, our biases and setups are essentially unchanged this week. Note that each day in the past trading week cut through the 20 XMA on the daily chart. We still think that stock traders should be focusing much attention on the broad indexes, as long/short positions are likely to show a very high correlation to the market on any substantial breakout (in either direction). Longer-term (2+ months), bullish patterns are still strong and intact. 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 and/or stocks which are pressing to new highs. Stocks showing strength in this environment are likely to outpace the market on the next rally leg. Chart examples in this section show a few important refinements than can be generalized to other stocks and similar patterns. Tactical Playbook, Week of 10 April 2017 Example Trade Entries Buy CTRP on a breakout above against an initial stop around Buy PVH on a breakout above against an initial stop around Sell (short) SPG on a breakdown below against an initial stop around Sell (short) KR 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 10 April

9 Tactical Playbook, Week of 10 April 2017 Volatility & Risk Forecast Volatility Average realized volatility over the next month is expected to be 7.8% Volatility is currently roughly in-line with the forecast. Current Volatility (and one year review) 20HVol 60HVol 120HVol 252HVol VIX Now 6.6% 6.5% 7.5% 9.8% 12.9% Max (1 yr) 20.3% 16.9% 16.7% 17.2% 25.8% Min (1 yr) 4.6% 6.3% 7.4% 9.8% 10.6% Percentile 21.5% 1.9% 0.3% 0.0% 46.2% Avg (5 yr) 12.0% 12.4% 12.6% 12.8% 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 10 April 2017 Global Stocks Global stocks were mixed last week: Europe and the US were down, Asia was mixed, and a few countries held on to decent gains. In most cases, weekly changes were within +/- 1.0σ well within the range of statistical noise. We have very little in the way of new information for global stocks. Europe and the UK continue to hold good bullish patterns. Asia/Pacific stocks have shown some good trades in recent weeks, and now likely need a bit more time to reset and to set up better trades. This is a bullish environment for stocks. Given the headlines and the apparently precarious nature of much global news, this may be surprising to some traders, but these apparent disconnects between casual macro analysis and price action are significant the market speaks strongly at these points. 10

11 Tactical Playbook, Week of 10 April 2017 Rates & FX Most moves in currencies and rates were muted last week, with very few large moves to catch attention. US Treasury futures (10 and 30 years) are engaging the top end of the larger trading range. Day to day and week to week action has been disappointing in these instruments, but the monthly pattern demands attention. Remember that monthly patterns play out slowly (a move here can easily take 1+ years to develop), but there is clear higher timeframe bearish potential in Treasuries. The US Dollar rallied last week, probably due to geopolitical tensions, but we do not see any strong statistical support for any short-term edge. Best expectation is random walk, at least in the short term. Regardless of crosscurrents, strong price action triggers (i.e., large sigma moves on daily or weekly timeframes) are likely to lead to tradable patterns and to moves that will have continuation. 11

12 Rates & FX (continued) Tactical Playbook, Week of 10 April

13 Tactical Playbook, Week of 10 April 2017 Commodities Metals: May have exhausted short-term upside potential. Look for the bears to have a chance this week, but no clear structural support for a larger intermediate-term move in either direction. Energy: Crude oil continued to rally in the face of geopolitical uncertainty last week. Set this aside, and focus on the technical landscape: critically, prices are now coming back into the lower end of the trading range. Watch for potential weakness to develop here. Foods & Softs: Soybeans likely consolidating for another decline. 13

14 Commodities (continued) Tactical Playbook, Week of 10 April

15 Tactical Playbook, Week of 10 April 2017 Macroeconomics Unemployment continues to decline, pointing toward a healthy labor market. However, very low labor supply has not translated to wage pressure. In fact, recent measures show wages are stalling; this is not what we would normally expect in a robust labor market. Manufacturing numbers continue to paint a complicated picture that at least hints of recovery. Some measures (e.g., manufacturing employment) are negative, but early indications point toward further strength. Volatility remains at very low levels a sign of potential complacency, and a possible risk factor. This week, watch PPI-FD on Thursday and a battery of consumer-related numbers early Friday morning. 15

16 Tactical Playbook, Week of 10 April 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 4/3/17 S Full USDJPY PB % 0.3% 0.1x 0.1x 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 USDJPY trade. Potential entries Sell S&P 500 ( Jun) 2,334.00, against an initial stop around 2, Buy S&P 500 ( Jun) 2,373.00, against an initial stop around 2, Sell Crude Oil ( Jun) 51.13, against an initial stop around Sell EURUSD , against an initial stop around Sell 30 yr Bonds ( Jun) /32, against an initial stop around 153 9/32. *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 10 April 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 Airlines Mexico Financials Internet & Catalog Ret IT Svcs Taiwan Materials Tobacco Household Durables Thailand Industrials Road & Rail Construction & Eng Greece Utilities Gas Utilities Life Scis Tools & Svcs Nthrlands Consumer Discretionary Commercial Banks Auto Components S Korea Consumer Staples Div Consumer Svcs Household Products Hong Kong Health Care Aerospace & Defence Marine Russia (NDQ OMX 15) Energy Media Beverages France Telcom Svcs Construction Materials Pharmaceuticals Indonesia US Industry Groups Now Chg VRat Ind Pwr Prod & Trdrs Industrial Conglomerates Singapore Tech Hardware & Equip Machinery Thrifts & Mrtg Finace Germany Banks Semis & Semi Equip Containers & Packaging S&P 500 Index Media Software Food Products Australia Semis & Semis Equip Elec Equip & Cmpnnts Specialty Retail Arabia Titans Consumer Svcs Health Care Tech REITs Phlippnes Diversified Financials Paper & Forest Products Air Freight & Logistics Israel Materials Htls Rests & Leisure Energy Equip & Svcs UK Software & Svcs Metals & Mining BioTech Finland Capital Goods Water Utilities Professional Svcs Switzerland Insurance Chemicals Food & Staples Ret Canada Transportation Capital Markets Building Products Sweden Utilities Div Financial Svcs Oil, Gas&Consmble Fuels Japan Health Care Equip & Svcs Trading Cos & Dists Div Telcom Svcs S Africa Food Beverage & Tobacco Consumer Finance Txtils, Apprl & Lux Gds India (SP India 10) Retailing Insurance Leisure Equip & Prds US Mkt Cap Indexes Now Chg VRat Real Estate HCare Prov & Svcs Wireless Telcom Svcs US Growth Commercial & Prof Svcs Electrical Equip Automobiles DJ Wilshire 5000 Comp Household & Prsnl Prod Comm Svcs & Supplies Distributors Russell 2000 Index Pharma, Biotech & Life Sci Internet Soft &Svcs Personal Products S&P 500 Index Food & Staples Retailing Electric Utilities Multiline Retail S&P 100 Index Energy Communications Equip S&P SmallCap 600 Index Cons Durables & Apparel HCare Equip & Supply Russell MicroCap Index Telcom Svcs Multi-Utilities US Value

18 Tactical Playbook, Week of 10 April 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 10 April 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