Tactical Playbook - Constant...

©2016 Waverly Advisors, LLC. All Rights Reserved. Please review disclosures on the final page of this report.

Market context and trade ideas for the active trader

Waverly Advisors, LLC

Adam GrimesChief Investment [email protected]@waverlyadvisors.com

Contact Sales: (607) [email protected]

Tactical PlaybookWeek of 10 April 2017

Contents

Market Insight 2U.S. Equities 3Equity Indexes: Short-Term 5U.S. Equity Sectors 6U.S. Individual Stocks 7Volatility & Risk 9Global Stocks 10Rates & FX 11Commodities 13Macroeconomics 15Discretionary Trade Ideas 16Relative Strength Rankings 17Equity Screens & Models 18Disclaimers & Contact 19

Market Return σSpike Kpos Trend VolatilityUSA (0.30%) (0.3σ) 81 Bull QuietEurope (0.66%) (0.6σ) 84 Bull QuietAsia (0.33%) (0.2σ) 92 Bull QuietEurope (0.66%) (0.6σ) 84 Bull QuietEmerging (0.05%) (0.0σ) 87 Bull Quiet30 Yr Tr 0.44% 0.4σ 51 Bear/Neutral QuietEuro (0.59%) (0.6σ) 36 Bear/Neutral QuietYen (0.32%) (0.2σ) 41 Bull/Neutral NormalGold 0.49% 0.3σ 65 Bear/Neutral QuietCrude 3.24% 0.9σ 51 Bear/Neutral Quiet

Last Week’s Performance

MarketShort term (< 1 month)

Int. Term (2-12 months)

USA UpEurope Up UpAsia UpTrsry FutsDollarPound DownEuro DownYenGoldCrude Down

Major Market Direction and Bias

▶ US stock indexes touched the 20 period EMA every day last week, and 8 out of the past 10 trading sessions. This is indica-tive 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.

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Tactical Playbook, Week of 10 April 2017

2©2017 Waverly Advisors, LLC. All Rights Reserved. Please review disclosures on the final page of this report.

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 & GlobalStocks 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.

The second moveThe 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 try-ing 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 struc-tures 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 inde-cision.) Watch these markets play out, and adjust your thinking to focusing on the “second move” on the timeframes and markets you follow.



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 dai-ly 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.



U.S. Equities (continued)

Sector Assessment Weight LastChg RelPerfTechnology 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 -

U.S. Large Cap Sector Weighting



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 “trend-ing” 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).

Market ATR 20 Avg Gap% GapsS&P 500 17.85 4.84 11.7%R2K 19.13 4.11 7.8%MiniDow 140 42 12.2%

Gap & Risk Analysis



U.S. Equity Sectors ▶ We have no changes to sector biases or allocations this week.

▶ We hold overweights in Consumer Discretionary, Technology and Industri-als.

▶ Correct overweights in this environment are essentially bullish bets on mar-ket direction. Be aware that heavy tilts toward sensitive or cyclical sectors (and/or corresponding overweights to defensive) may increase risk and ex-posure.

▶ We see warning signs in Energy, Healthcare, and Financials and look for pos-sible continued underperformance there.

Key: ! = overextension, !* = extreme overextension

Sector Leaders & Laggards

EnergyLeaders COG, CHK, EQT, PXD, BHI, COP

Laggards HES, RIG, XEC, PSX, DO, HP

IndustrialsLeaders CSX, FBHS, EFX, PH, FTV, SWK

Laggards AYI!*, RHI!, PBI, DAL, AAL, DNB

TechnologyLeaders SWKS!, QRVO!, MU, WDC!, ATVI, ADBE

Laggards FTR, HPE!*, FSLR, AKAM!*, WU!, QCOM

MaterialsLeaders FMC!*, ALB, IFF, MON!, SHW, PPG

Laggards AA, SEE!, BLL, CF, APD, MOS

DiscretionaryLeaders WYNN, SPLS!, CMG, DRI!, VIAB, AMZN

Laggards URBN, AN!, LB, TGT, SIG, KMX

Fin SvcsLeaders MCO, LM, SPGI, LUK, AMP, PGR

Laggards SYF, DFS, COF, FITB, PBCT, BBT

Real EstateLeaders KIM!, CBG, GGP, MAC, SPG, VNO

Laggards AMT!*, WY, HCN!*, EQIX, CCI, HCP

StaplesLeaders PM, MJN!*, STZ!, RAI!*, KMB, COST

Laggards GIS!, CPB, CVS, HRL, SJM!*, SYY

HealthcareLeaders VRTX!*, CERN!, ILMN, ISRG, CNC, BAX

Laggards MNK, ALXN, PRGO(E), BMY, BIIB, ENDP

UtilitiesLeaders NRG, CNP, PCG, EIX, PNW, PPL

Laggards SCG, AES, FE, EXC, SO, PEG



U.S. Individual Stocks ▶ With no new information from stocks, our biases and setups are essentially un-

changed 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.

Example Trade Entries ▶ Buy CTRP on a breakout above 50.66 against an initial stop around 47.38.

▶ Buy PVH on a breakout above 104.62 against an initial stop around 100.00.

▶ Sell (short) SPG on a breakdown below 169.00 against an initial stop around 175.00.

▶ Sell (short) KR on a breakdown below 29.19 against an initial stop around 30.20.

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.)



U.S. Individual Stocks (continued)



Volatility & RiskForecast 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%+ 2,487.15 2,626.50 2,748.66 2,847.00 3,085.63 3,505.05

mean 2,358.86 2,368.84 2,382.21 2,395.67 2,436.47 2,528.72

95%- 2,230.57 2,111.18 2,015.77 1,944.33 1,787.31 1,552.38



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 appar-ently 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.



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 expec-tation 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.



Rates & FX (continued)



CommoditiesMetals:

▶ 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 intermedi-ate-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.



Commodities (continued)



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 pos-sible risk factor.

▶ This week, watch PPI-FD on Thursday and a battery of consumer-related numbers early Friday morning.



Discretionary Trade Ideas

Commentary ▶ We tightened the stop on the USDJPY trade.

Potential entries ▶ Sell S&P 500 ( Jun) 2,334.00, against an initial stop around 2,378.00.

▶ Buy S&P 500 ( Jun) 2,373.00, against an initial stop around 2,334.00.

▶ Sell Crude Oil ( Jun) 51.13, against an initial stop around 53.86.

▶ Sell EURUSD 1.05700, against an initial stop around 1.07200.

▶ Sell 30 yr Bonds ( Jun) 150 23/32, 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.

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 111.330 113.600 111.040 109.060 111.830 0.9 22% 0.3% 0.1x 0.1x

Key: I = Intermediate-term (otherwise it is short-term), PB = Pullback, A = Anti, FT = Failure Test, BO = Breakout



Relative Strength Rankings

International Now Chg VRat US Sectors (SP1500) Now Chg VRat US Industries (Top) Now Chg VRat US Industries (Bottom) Now Chg VRat

Brazil 1 0 0.9 Information Tech 1 0 0.3 Comps & Peripherals 1 0 0.5 Airlines 35 -3 0.8

Mexico 2 4 0.7 Financials 2 0 0.6 Internet & Catalog Ret 2 0 0.9 IT Svcs 36 0 0.4

Taiwan 3 -1 1.5 Materials 3 0 0.6 Tobacco 3 5 0.8 Household Durables 37 -7 0.7

Thailand 4 8 0.6 Industrials 4 1 0.5 Road & Rail 4 6 0.6 Construction & Eng 38 -5 0.6

Greece 5 3 0.5 Utilities 5 2 0.6 Gas Utilities 5 24 0.6 Life Scis Tools & Svcs 39 -4 0.8

Nthrlands 6 -1 0.6 Consumer Discretionary 6 -2 0.8 Commercial Banks 6 -3 0.5 Auto Components 40 -33 1.3

S Korea 7 -4 0.9 Consumer Staples 7 1 0.5 Div Consumer Svcs 7 -1 1.3 Household Products 41 0 0.4

Hong Kong 8 6 0.9 Health Care 8 -2 0.4 Aerospace & Defence 8 9 1.1 Marine 42 6 0.9

Russia (NDQ OMX 15) 9 6 1.5 Energy 9 0 0.7 Media 9 0 1.0 Beverages 43 9 0.6

France 10 0 0.9 Telcom Svcs 10 0 1.2 Construction Materials 10 16 1.0 Pharmaceuticals 44 3 0.3

Indonesia 11 6 1.0 US Industry Groups Now Chg VRat Ind Pwr Prod & Trdrs 11 1 0.7 Industrial Conglomerates 45 6 0.3

Singapore 12 -3 0.5 Tech Hardware & Equip 1 0 0.6 Machinery 12 2 0.7 Thrifts & Mrtg Finace 46 -6 0.9

Germany 13 -6 0.7 Banks 2 0 0.5 Semis & Semi Equip 13 -9 0.5 Containers & Packaging 47 2 0.6

S&P 500 Index 14 -3 0.5 Media 3 1 1.0 Software 14 -3 0.4 Food Products 48 7 0.3

Australia 15 -11 0.8 Semis & Semis Equip 4 -1 0.5 Elec Equip & Cmpnnts 15 -10 0.9 Specialty Retail 49 -4 1.2

Arabia Titans 50 16 7 1.2 Consumer Svcs 5 0 0.6 Health Care Tech 16 3 0.6 REITs 50 0 1.5

Phlippnes 17 8 1.0 Diversified Financials 6 0 0.5 Paper & Forest Products 17 14 1.1 Air Freight & Logistics 51 -9 0.5

Israel 18 4 0.4 Materials 7 1 0.6 Htls Rests & Leisure 18 -2 0.6 Energy Equip & Svcs 52 2 0.6

UK 19 2 0.7 Software & Svcs 8 -1 0.1 Metals & Mining 19 19 0.7 BioTech 53 0 0.8

Finland 20 -2 1.0 Capital Goods 9 1 0.7 Water Utilities 20 17 0.8 Professional Svcs 54 -10 0.8

Switzerland 21 -5 0.6 Insurance 10 -1 0.8 Chemicals 21 -1 0.6 Food & Staples Ret 55 2 1.1

Canada 22 -3 0.3 Transportation 11 0 0.3 Capital Markets 22 -4 0.5 Building Products 56 -17 1.2

Sweden 22 -9 0.8 Utilities 12 4 0.6 Div Financial Svcs 23 5 0.5 Oil, Gas&Consmble Fuels 57 1 0.7

Japan 24 -4 1.2 Health Care Equip & Svcs 13 0 0.7 Trading Cos & Dists 24 -11 0.4 Div Telcom Svcs 58 3 1.2

S Africa 25 -1 0.6 Food Beverage & Tobacco 14 1 0.4 Consumer Finance 25 -10 0.6 Txtils, Apprl & Lux Gds 59 1 0.8

India (SP India 10) 26 0 0.7 Retailing 15 -3 0.6 Insurance 26 1 0.8 Leisure Equip & Prds 60 -4 0.6

US Mkt Cap Indexes Now Chg VRat Real Estate 16 6 0.4 HCare Prov & Svcs 27 7 0.6 Wireless Telcom Svcs 61 2 0.6

US Growth 1 0 0.5 Commercial & Prof Svcs 17 -3 1.1 Electrical Equip 28 -6 0.5 Automobiles 62 -3 0.8

DJ Wilshire 5000 Comp 2 3 0.6 Household & Prsnl Prod 18 -1 0.4 Comm Svcs & Supplies 29 -4 1.2 Distributors 63 1 1.0

Russell 2000 Index 3 -1 1.0 Pharma, Biotech & Life Sci 19 0 0.5 Internet Soft &Svcs 30 -9 0.7 Personal Products 64 -2 0.5

S&P 500 Index 4 2 0.5 Food & Staples Retailing 20 1 1.1 Electric Utilities 31 12 0.7 Multiline Retail 65 0 0.9

S&P 100 Index 5 2 0.5 Energy 21 2 0.7 Communications Equip 32 -9 0.9

S&P SmallCap 600 Index 6 -3 1.2 Cons Durables & Apparel 22 -2 0.9 HCare Equip & Supply 33 -9 0.6

Russell MicroCap Index 7 -3 1.0 Telcom Svcs 23 1 1.2 Multi-Utilities 34 12 0.4

US Value 8 0 0.6



Equity Screens & Models

Equity Screens, Trading Models, and Systems are available in the Excel attachment to this email.

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.



Disclaimers & Contact

Waverly Advisors, LLC

5607 Pittsford-Palmyra Rd. #1034Pittsford, NY 14534

(607) 684-5300 or [email protected]

The Tactical Playbook (“The Report”) is a newsletter published by Waverly Advisors LLC. Receipt of The Report is subject to terms of service: http://waverlyadvisors.com/legal/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 www.waverlyadvisors.com (“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 op-tions 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 2016. 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.

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