Tactical Portfolio Outlook

Transcription

1 Tactical Portfolio Outlook Week of 9 January 2017 Market perspectives for the long-term investor and portfolio allocator Stocks begin the year with a vote of confidence. Our longer-term perspective and bias on stocks is unchanged, and appears to be strongly confirmed by recent action: We see every evidence that strength will continue in stocks, and that the US will lead global stock markets higher. We have moved to an overweight on Technology stocks. Europe and UK stocks are showing short-term bullish patterns. Look for shorter-term trades (i.e., weeks) in some Asia/ Pacific economies. Developed nations stocks outperformed Emerging Markets over the past quarter, and we expect this pattern to continue in coming quarters. The EM strong theme of early 2016 was likely a correction in a much longer-term and intact period of underperformance. The USD appears set for further strength. Expect that JPY weakness may be a persistent theme for the next few months. In commodities, we see little clarity and few strong directional setups. Most potential entries and inflection points require at least a few more weeks to develop. Major Market Direction and Bias Market Short term (< 1 month) Int. Term (2-12 months) USA Up Up Europe Up Up Asia Up 10 Yr Tr Down Dollar Up Up Pound Down Down Euro Down Down Yen Down Down Gold Crude Last Week s Performance Market Return σspike Kpos Trend Volatility USA 1.70% 1.1σ 96 Bull Quiet Europe 1.00% 0.7σ 72 Bull/Neutral Quiet Asia 2.28% 1.4σ 73 Bull Quiet Developed 2.34% 1.8σ 86 Bull Quiet Emerging 2.66% 1.3σ 56 Bear/Neutral Quiet 30 Yr Tr 0.75% 0.5σ 22 Bear Quiet Euro 0.11% 0.1σ 25 Bear Normal Yen (0.03%) (0.0σ) 99 Bull Normal Gold 1.84% 0.9σ 23 Bear Quiet Crude (0.04%) (0.0σ) 70 Bull Quiet Waverly Advisors, LLC Adam Grimes Chief Investment Officer grimes@waverlyadvisors.com info@waverlyadvisors.com Contact Sales: (607) sales@waverlyadvisors.com Contents Portfolio Perspective 2 Market Bias 3 U.S. Equities 4 U.S. Equity Sectors 5 U.S. Individual Stocks 7 Global Stocks 9 Rates & FX 10 Commodities 11 Macroeconomics 12 Hedging: Context & Strategies 13 Market Insight 14 Relative Strength Rankings 15 Disclaimers & Contact 16

2 Portfolio Perspective The beginning of a new calendar year is always a constructive time to review setups and biases across major markets. In this section, we will present a quick summary of tendencies on longer timeframes and potential risks and inflections on shorter timeframes. US and global stocks Here, we have no surprises. For many years, we ve held a strong bullish bias on stocks. We think the longer term chart (inset on this page) of the S&P 500, which provides a perspective spanning more than a generation, provides a good reminder that stocks, over most timeframes, do tend to go up. Drilling down into shorter timeframes (i.e., years), we find the S&P 500 in an uptrend since the lows, and can see that was likely a proportional correction in this historic bull market. From current levels, there is the potential for a multi-year rally, perhaps extending over 100% from current levels. Concerns about valuation are somewhat misplaced, as stocks have rallied for many years while valuations become higher and higher. (Note that commentators always need points of concern to discuss, but P/E ratios are particularly unreliable, depending on which E is used to evaluation. Ratio-based metrics are always suspect.) Tactical Portfolio Outlook, Week of 9 January 2017 Look for all stock indexes to have a bullish bias this year, with the US continuing to lead. Expect that Developed stocks will outperform Emerging Markets for substantial periods. It would take substantial and continued weakness, a shift in character, and strong downward momentum to significantly challenge this perspective on stocks. Focus on long exposure, and be prepared for short-lived periods of volatility and potential shakeouts. USD and rates The US Dollar appears set to continue to appreciate through the next year. Significant short-term weakness could contradict this call, but every sign points higher. Technical cues for changes in rates are somewhat less reliable (as there are significant influences outside of supply and demand on rates), but many fixed income instruments are showing signs of stress. Directional traders will likely find good trades in the USD (or currencies against the USD) and JPY this year. For investors and allocators, clean trends in these currencies could drive some investment themes, as well. In world currencies, these two currencies are set for stronger trends than, for instance, the GBP, EUR, or many minor currencies. Commodities Interestingly, we see much less clarity in most commodities, at least in the near-term. Longer-term, precious metals are probably in the process of a trend change to the upside, but this could take many months to develop. In the shorter-term, lower prices are likely ahead for gold and silver. Crude and distillates are at a potential inflection; higher prices could lead to multimonth uptrends, but this is not the most likely outcome at this time. Rather, expect crude to back away from resistance at the top of the range, and to remain rangebound for the foreseeable future. Sharp momentum and large price changes could change this picture, so monitor developments in crude oil carefully. 2

3 Tactical Portfolio Outlook, Week of 9 January 2017 Market Bias IT LT 1 Year 3 Year IT LT 1 Year 3 Year IT LT 1 Year 3 Year US Stocks Up World Stocks Up Rates & FX S&P 500 SPY Up Developed URTH Up Up Yr Tr Rate $TYX.X 0.8 (7.9) Russell 2000 IWM Up Emerging EEM 21.8 (11.0) 10 Yr Tr Rate $TNX.X 2.9 (4.4) Frontier FM Avoid 9.4 (24.0) 5 Yr Tr Rate $FVX.X US Sectors US Dollar UUP Up Up Energy XLE Market 35.4 (13.0) Europe Industrial XLI Market Broad Europe VGK Up Up 4.2 (17.0) Fixed Income Technology XLK Over UK EWU Up 3.6 (25.0) US Bond Mkt BND Caution (0.4) - Materials XLB Market Germany EWG 10.6 (13.0) Treasuries TLT Down Down (2.0) 16.0 Cons Disc XLY Market France EWQ 9.9 (11.0) TIPS TIP Financials XLF Market Italy EWI (3.7) (22.0) High Yield Bond HYG 9.7 (7.0) Cons Staples XLP Market Russia RSX Up 61.4 (22.0) World Bond BNDX Caution Caution HealthCare XLV Market EM Bond VWOB Caution Utilities XLU Market Asia & Pac Up Muni National LT MLN Caution (3.8) 7.0 Mtls & Mining XME (22.0) Japan EWJ Ok Muni National ST SHM Caution (1.6) (1.0) REITs IYR China FXI 13.1 (2.0) Muni High Yield HYD Caution (4.2) 3.0 Homebuilders XHB Hong Kong EWH 9.7 (1.0) Australia EWA 24.1 (14.0) Commodities ex US India EPI Caution Broad DBC 23.7 (36.0) Canada EWC 34.1 (6.0) South Korea EWY 16.3 (10.0) Gold&Slv GLD 5.7 (7.0) Mexico EWW Caution (5.0) (36.0) Taiwan EWT Oil USO 19.2 (65.0) Brazil EWZ 82.6 (18.0) Singapore EWS 8.1 (20.0) Natural Gas UNG (11.3) (59.0) Agricultural DBA 1.0 (16.0) 3

4 U.S. Equities US stocks were strong last week, with most major indexes closing up more than 1σ for the week. Longer-term structures point solidly to the upside. There is a good chance that the past month s action represents a breakout to a new leg in the bull market. A few thoughts on valuation, since P/E ratios are getting some attention: these ratios are not and have never been a reliable guide to market direction. We have no concerns about buying overvalued markets, any more than we would about buying anything in a technical uptrend. We have moved to an overweight on Technology stocks this week. Volatility is low, so there is always the chance of a drop to reset psychology. Regardless, stocks point higher over all timeframes. Tactical Portfolio Outlook, Week of 9 January

5 U.S. Equity Sectors We are still reluctant to commit too much risk to over/underweights, as market conditions suggest further rotation could be in the cards. Financials seem well-positioned for continued leadership, but there are significant risks to initiating overweights in this sector at this time. Either wait, or plan to buy more at lower (relative) levels. We have moved to an overweight on Technology. This has been a leader, and is set for future leadership as well. Still watching Financials, Discretionary, and Industrials for action points. Underweights in defensive Staples and Utilities are possible. Tactical Portfolio Outlook, Week of 9 January 2017 Energy Sector & RIG, HAL!, FTI, DO, HP, BHI SWN, RRC, EQT, COG, TSO, APA Industrials Technology Materials Discretionary Fin Svcs Real Estate Staples Healthcare URI, TXT, DE!*, CSX, UAL, LUV FTV, NLSN, KSU, AYI, XYL, PNR NVDA, AKAM, LVLT!, MU, TSS!*, JNPR XRX!*, FSLR, HPQ, ATVI, RHT, EA CF!*, FCX, MOS, FMC, EMN, MLM WRK, AA, IFF, PX, PPG, AVY NFLX, HAR, KMX, DIS!*, FOXA, SNI M!*, KSS!*, URBN!*, JWN!*, LB!*, RL!* GS, CMA, KEY, CFG, BAC, RF MCO, AMG, LM, SPGI, CINF, AFL CCI, KIM, IRM, WY, VTR, AMT DLR!*, EQIX!, VNO!, ESS, EXR!, PSA RAI, CPB, HSY, SYY, MO, COST CAG, STZ, WMT, MJN, MKC, GIS ALXN!*, ABC!, CELG, UNH, CI, BMY CERN, ZBH, MNK, REGN, MDT, VAR NRG!, EXC, CNP!, AEE, PEG, PNW Utilities NEE, SCG, NI, SO, AES, AWK Key:! = overextension,!* = extreme overextension 5

6 Tactical Portfolio Outlook, Week of 9 January 2017 U.S. Equity Sectors (continued) Domestic Sector Model Sector Ticker Benchmark Weight LastChg Rel. Perf. Technology XLK 19.9% Over 1/6/17 0.0% Financials XLF 16.7% Market 9/2/16 - Hcare XLV 14.9% Market 7/1/16 - Discret nary XLY 12.6% Market 9/2/16 - Industrials XLI 10.4% Market 9/16/16 - Staples XLP 9.7% Market 10/10/14 - Energy XLE 8.0% Market 9/12/14 - Utilities XLU 4.0% Market 10/10/14 - Materials XLB 3.9% Market 9/16/16 - Global Equity Model Country Ticker Benchmark Weight Tilt Model United States [USA] 51.1% Over 19.7% 70.8% Japan DXJ 7.6% Market 0.0% 7.6% United Kingdom EWU 6.2% Market 0.0% 6.2% Switzerland EWL 3.6% Market 0.0% 3.6% France EWQ 3.4% Market 0.0% 3.4% Germany EWG 3.1% Market 0.0% 3.1% Canada EWC 3.0% Market 0.0% 3.0% Australia EWA 2.3% Market 0.0% 2.3% China FXI 2.6% Under -2.6% 0.0% EMI EEM 17.1% Under -17.1% 0.0% Total 100.0% 100.0% 6

7 U.S. Individual Stocks Look for a continued resumption of trading activity and new volatility over the next few months. Expect that, overall, volatility will remain muted relative to long-term averages. We suggest a significant long tilt, but taking shorts as they present themselves. Do not seek to hedge exposures, but be prepared to accept losses on one side (long/ short) of the book. Best long setups are large, complex consolidations that are in the process of breaking the upside. Consider relative strength leaders, and look for evidence of multiple tests keeping pressure against resistance. It is ok to chase breakouts slightly in this environment. Clean, short bull flags are always attractive structures. Best shorts are probably developing on weekly charts. Look for bear flags or other consolidations suggesting breakdowns. Tactical Portfolio Outlook, Week of 9 January 2017 Example Trade Entries Buy DVMT on a breakout above against an initial stop around Buy COST on a breakout above against an initial stop around Buy CBOE on a breakout above against an initial stop around Sell (short) CCI 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 Portfolio Outlook, Week of 9 January

9 Tactical Portfolio Outlook, Week of 9 January 2017 Global Stocks Global stocks started the year with strong to moderate rallies across the board. Europe and UK stocks are showing ever more bullish structures, but we still do not see the conviction that drives US stocks. Asian and Pacific stocks show a wider divergence, with some nations tilting toward short-term strength and some with significantly bearish overhandgs. Developed stocks outstripped EM stocks in the last quarter (2.9% vs. -4.0% from 9/30/16. The S&P 500 returned 5.0% over the same period.) We see support for continued underperformance of EM nations. We still think the US is likely to lead/outperform over periods of months to quarters. 9

10 Tactical Portfolio Outlook, Week of 9 January 2017 Rates & FX Treasury futures are in intermediate term downtrends, and we may have opportunities for targeted short trades in coming weeks. With domestic interest rates at a significant inflection, many fixed income ETFs are showing at least short-term warnings of price weakness. Eurobond futures do not show the same weakness as Treasuries. Consider spread trades between these instruments. The USD appears set for further strength against most other world currencies. JPY weakness may be a persistent theme in the first quarter of Directional traders are facing many setups that are driven by JPY be careful of concentrated exposure. 10

11 Tactical Portfolio Outlook, Week of 9 January 2017 Commodities We see little clarity and few valid directional biases in most commodities. Metals: Recent strength does not rise to the level that would challenge intermediate term downtrends in precious metals. Bulls are early, and maybe wrong. Energy: Watch as pressure accumulates against the top of the trading range. At this point, probabilities favor a selloff, but upward momentum could lead to an extended rally with good trading opportunities. Foods & Softs: No clear patterns in most softs and foods. 11

12 Tactical Portfolio Outlook, Week of 9 January 2017 Macroeconomics Psychological factors are driving markets now, more than actual economic data. The data, as released, appears to be at least moderately constructive. Jobs continue to be strong, but pressure on wages has, so far, been moderate. Recent months do show some small increase in hourly wages. A strong dollar will likely continue to put pressure on manufacturing and exports, while favoring services. ISM Non-manufacturing finished the year with strong readings. Construction spending also shows some moderate strength, both residential and non-residential (driven by Federal construction spending). Few datapoints in the week ahead: Jobless claims Thursday; PPI-FD and Retail Sales on Friday stand out. 12

13 Tactical Portfolio Outlook, Week of 9 January 2017 Hedging: Context & Strategies There is a very high probability that prices will be higher over the next few months. Tactical risks are low. Volatility also hovers near historic lows. This is a good spot to initiate longer-dated hedges. We advise hedging partial portfolios against moderate (<15%) declines over 6-9 months. Tail risk hedges may also be priced attractively. Look to add to hedges on market rallies, not into declines. Key: Dotted line = S&P 500, Gray = Options, Orange = Combined Portfolio 13

14 Relative Strength Rankings Tactical Portfolio Outlook, Week of 9 January 2017 International Now Chg VRat US Sectors (SP1500) Now Chg VRat US Industries (Top) Now Chg VRat US Industries (Bottom) Now Chg VRat Russia (NDQ OMX 15) Financials Commercial Banks Communications Equip Brazil Industrials Metals & Mining Chemicals Greece Information Tech Consumer Finance Ind Pwr Prod & Trdrs Canada Materials Airlines Gas Utilities S Africa Energy Capital Markets Htls Rests & Leisure Thailand Consumer Discretionary Energy Equip & Svcs HCare Prov & Svcs Germany Telcom Svcs Thrifts & Mrtg Finace Industrial Conglomerates S&P 500 Index Utilities Construction Materials Building Products France Health Care Elec Equip & Cmpnnts Household Durables Australia Consumer Staples Road & Rail Multi-Utilities Japan US Industry Groups Now Chg VRat Machinery Leisure Equip & Prds Taiwan Banks Semis & Semi Equip Life Scis Tools & Svcs Arabia Titans Diversified Financials Div Financial Svcs Div Telcom Svcs Nthrlands Semis & Semis Equip Construction & Eng BioTech Sweden Transportation Trading Cos & Dists Professional Svcs UK Tech Hardware & Equip Wireless Telcom Svcs Tobacco Finland Insurance Comps & Peripherals Electric Utilities Switzerland Media Aerospace & Defence Food Products Indonesia Materials Div Consumer Svcs REITs Singapore Energy Paper & Forest Products HCare Equip & Supply S Korea Capital Goods Insurance Distributors Hong Kong Automobiles & Compnts Auto Components Pharmaceuticals Phlippnes Software & Svcs Containers & Packaging Specialty Retail Israel Commercial & Prof Svcs Media Water Utilities India (SP India 10) Consumer Svcs Electrical Equip Household Products Mexico Telcom Svcs Comm Svcs & Supplies Food & Staples Ret US Mkt Cap Indexes Now Chg VRat Utilities Automobiles Beverages Russell MicroCap Index Retailing IT Svcs Real Estate Mgmt&Dev S&P SmallCap 600 Index Health Care Equip & Svcs Internet & Catalog Ret Txtils, Apprl & Lux Gds Russell 2000 Index Pharma, Biotech & Life Sci Air Freight & Logistics Personal Products US Value Real Estate Internet Soft &Svcs Multiline Retail DJ Wilshire 5000 Comp Food Beverage & Tobacco Oil, Gas&Consmble Fuels Health Care Tech S&P 100 Index Cons Durables & Apparel Marine S&P 500 Index Food & Staples Retailing Software US Growth Household & Prsnl Prod

15 Disclaimers & Contact Tactical Portfolio Outlook, Week of 9 January 2017 Waverly Advisors, LLC 5607 Pittsford-Palmyra Rd. #1034 Pittsford, NY (607) or info@waverlyadvisors.com 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. 15