tactical portfolio outlook - constant...

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

Market perspectives for the long-term investor and portfolio allocator

Waverly Advisors, LLC

Adam GrimesChief Investment [email protected]@waverlyadvisors.com

Contact Sales: (607) [email protected]

Tactical Portfolio OutlookWeek of 9 January 2017

Contents

Portfolio Perspective 2Market Bias 3U.S. Equities 4U.S. Equity Sectors 5U.S. Individual Stocks 7Global Stocks 9Rates & FX 10Commodities 11Macroeconomics 12Hedging: Context & Strategies 13Market Insight 14Relative Strength Rankings 15Disclaimers & Contact 16

Market Return σSpike Kpos Trend VolatilityUSA 1.70% 1.1σ 96 Bull QuietEurope 1.00% 0.7σ 72 Bull/Neutral QuietAsia 2.28% 1.4σ 73 Bull QuietDeveloped 2.34% 1.8σ 86 Bull QuietEmerging 2.66% 1.3σ 56 Bear/Neutral Quiet30 Yr Tr 0.75% 0.5σ 22 Bear QuietEuro 0.11% 0.1σ 25 Bear NormalYen (0.03%) (0.0σ) 99 Bull NormalGold 1.84% 0.9σ 23 Bear QuietCrude (0.04%) (0.0σ) 70 Bull Quiet

Last Week’s Performance

MarketShort term (< 1 month)

Int. Term (2-12 months)

USA Up UpEurope Up UpAsia Up10 Yr Tr DownDollar Up UpPound Down DownEuro Down DownYen Down DownGoldCrude

Major Market Direction and Bias

▶ 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.

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Tactical Portfolio Outlook, Week of 9 January 2017

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

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 stocksHere, 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 2008-2009 lows, and can see that 2014-2016 was likely a proportional correction in this histor-ic 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 ra-tios are particularly unreliable, depending on which “E” is used to evaluation. Ra-

tio-based metrics are always suspect.)

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 substan-tial 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 ratesThe US Dollar appears set to continue to appreciate through the next year. Signif-icant 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 instru-ments 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 cur-rencies 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.

CommoditiesInterestingly, 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 pric-es are likely ahead for gold and silver.

Crude and distillates are at a potential inflection; higher prices could lead to multi-month 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 range-bound for the foreseeable future. Sharp momentum and large price changes could change this picture, so monitor developments in crude oil carefully.



Market BiasIT 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 18.4 23.0 Developed URTH Up Up 15.4 7.0 30 Yr Tr Rate $TYX.X 0.8 (7.9)

Russell 2000 IWM Up 30.7 17.0 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 3.4 3.0

US Sectors US Dollar UUP Up Up 3.3 22.0

Energy XLE Market 35.4 (13.0) Europe

Industrial XLI Market 27.0 22.0 Broad Europe VGK Up Up 4.2 (17.0) Fixed Income

Technology XLK Over 23.2 40.0 UK EWU Up 3.6 (25.0) US Bond Mkt BND Caution (0.4) -

Materials XLB Market 26.4 11.0 Germany EWG 10.6 (13.0) Treasuries TLT Down Down (2.0) 16.0

Cons Disc XLY Market 13.2 26.0 France EWQ 9.9 (11.0) TIPS TIP 2.8 2.0

Financials XLF Market 31.1 32.0 Italy EWI (3.7) (22.0) High Yield Bond HYG 9.7 (7.0)

Cons Staples XLP Market 6.3 23.0 Russia RSX Up 61.4 (22.0) World Bond BNDX Caution Caution 1.7 -

HealthCare XLV Market 4.3 25.0 EM Bond VWOB Caution 6.2 -

Utilities XLU Market 13.3 28.0 Asia & Pac Up Muni National LT MLN Caution (3.8) 7.0

Mtls & Mining XME 129.8 (22.0) Japan EWJ Ok 10.3 4.0 Muni National ST SHM Caution (1.6) (1.0)

REITs IYR 7.8 22.0 China FXI 13.1 (2.0) Muni High Yield HYD Caution (4.2) 3.0

Homebuilders XHB 10.2 4.0 Hong Kong EWH 9.7 (1.0)

Australia EWA 24.1 (14.0) Commodities

ex US India EPI Caution 8.9 20.0 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 29.1 8.0 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)



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.



U.S. Equity Sectors ▶ We are still reluctant to commit too much risk to over/underweights, as mar-

ket conditions suggest further rotation could be in the cards.

▶ Financials seem well-positioned for continued leadership, but there are sig-nificant 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.

Key: ! = overextension, !* = extreme overextension

Sector Leaders & Laggards

EnergyLeaders RIG, HAL!, FTI, DO, HP, BHI

Laggards SWN, RRC, EQT, COG, TSO, APA

IndustrialsLeaders URI, TXT, DE!*, CSX, UAL, LUV

Laggards FTV, NLSN, KSU, AYI, XYL, PNR

TechnologyLeaders NVDA, AKAM, LVLT!, MU, TSS!*, JNPR

Laggards XRX!*, FSLR, HPQ, ATVI, RHT, EA

MaterialsLeaders CF!*, FCX, MOS, FMC, EMN, MLM

Laggards WRK, AA, IFF, PX, PPG, AVY

DiscretionaryLeaders NFLX, HAR, KMX, DIS!*, FOXA, SNI

Laggards M!*, KSS!*, URBN!*, JWN!*, LB!*, RL!*

Fin SvcsLeaders GS, CMA, KEY, CFG, BAC, RF

Laggards MCO, AMG, LM, SPGI, CINF, AFL

Real EstateLeaders CCI, KIM, IRM, WY, VTR, AMT

Laggards DLR!*, EQIX!, VNO!, ESS, EXR!, PSA

StaplesLeaders RAI, CPB, HSY, SYY, MO, COST

Laggards CAG, STZ, WMT, MJN, MKC, GIS

HealthcareLeaders ALXN!*, ABC!, CELG, UNH, CI, BMY

Laggards CERN, ZBH, MNK, REGN, MDT, VAR

UtilitiesLeaders NRG!, EXC, CNP!, AEE, PEG, PNW

Laggards NEE, SCG, NI, SO, AES, AWK



U.S. Equity Sectors (continued)

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 -

Domestic Sector Model

Country Ticker Benchmark Weight Tilt ModelUnited 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%

Global Equity Model



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 break-ing the upside. Consider relative strength leaders, and look for evidence of multi-ple 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.

Example Trade Entries ▶ Buy DVMT on a breakout above 57.00 against an initial stop around 54.58.

▶ Buy COST on a breakout above 164.07 against an initial stop around 159.60.

▶ Buy CBOE on a breakout above 76.46 against an initial stop around 73.31.

▶ Sell (short) CCI on a breakdown below 84.99 against an initial stop around 88.83.

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)



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.



Rates & FX ▶ Treasury futures are in intermediate term downtrends, and we may have op-

portunities 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 curren-cies.

▶ JPY weakness may be a persistent theme in the first quarter of 2017. Direc-tional traders are facing many setups that are driven by JPY—be careful of concentrated exposure.



CommoditiesWe 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.



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. Re-cent 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.



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-dat-ed 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



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

Russia (NDQ OMX 15) 1 0 1.4 Financials 1 0 0.8 Commercial Banks 1 0 0.7 Communications Equip 35 -9 0.7

Brazil 2 0 0.5 Industrials 2 1 0.8 Metals & Mining 2 1 1.4 Chemicals 36 -3 1.1

Greece 3 0 0.4 Information Tech 3 2 0.9 Consumer Finance 3 1 1.0 Ind Pwr Prod & Trdrs 37 11 0.8

Canada 4 2 1.1 Materials 4 0 1.4 Airlines 4 -2 0.9 Gas Utilities 38 -9 0.7

S Africa 5 -1 0.5 Energy 5 -3 0.6 Capital Markets 5 7 0.8 Htls Rests & Leisure 39 -5 1.0

Thailand 6 2 0.9 Consumer Discretionary 6 1 1.2 Energy Equip & Svcs 6 8 0.5 HCare Prov & Svcs 40 9 0.6

Germany 7 -2 1.5 Telcom Svcs 7 -1 1.5 Thrifts & Mrtg Finace 7 -1 0.9 Industrial Conglomerates 41 -1 0.5

S&P 500 Index 8 3 1.0 Utilities 8 0 0.3 Construction Materials 8 -3 0.9 Building Products 42 9 1.2

France 9 -2 1.2 Health Care 9 1 0.7 Elec Equip & Cmpnnts 9 -1 1.1 Household Durables 43 3 1.2

Australia 10 2 0.6 Consumer Staples 10 -1 0.4 Road & Rail 10 -1 0.9 Multi-Utilities 44 -6 0.4

Japan 11 7 1.6 US Industry Groups Now Chg VRat Machinery 11 2 0.9 Leisure Equip & Prds 45 17 1.4

Taiwan 12 1 0.9 Banks 1 0 0.7 Semis & Semi Equip 12 -5 0.7 Life Scis Tools & Svcs 46 15 1.0

Arabia Titans 50 13 1 0.9 Diversified Financials 2 2 0.8 Div Financial Svcs 13 -2 0.4 Div Telcom Svcs 47 -16 1.5

Nthrlands 14 -5 1.3 Semis & Semis Equip 3 -1 0.7 Construction & Eng 14 1 0.8 BioTech 48 10 0.7

Sweden 15 -5 0.8 Transportation 4 -1 0.9 Trading Cos & Dists 15 -5 0.7 Professional Svcs 49 1 0.7

UK 16 1 1.1 Tech Hardware & Equip 5 0 0.7 Wireless Telcom Svcs 16 8 2.2 Tobacco 50 -9 0.4

Finland 17 -2 1.2 Insurance 6 0 0.8 Comps & Peripherals 17 -1 0.7 Electric Utilities 51 -8 0.3

Switzerland 18 1 1.1 Media 7 1 1.1 Aerospace & Defence 18 3 0.7 Food Products 52 -7 0.5

Indonesia 19 -3 0.3 Materials 8 1 1.4 Div Consumer Svcs 19 -2 1.1 REITs 53 -9 1.5

Singapore 20 1 1.5 Energy 9 -2 0.6 Paper & Forest Products 20 -2 1.1 HCare Equip & Supply 54 2 0.5

S Korea 21 -1 0.7 Capital Goods 10 0 0.8 Insurance 21 -2 0.8 Distributors 55 -3 0.8

Hong Kong 22 0 0.9 Automobiles & Compnts 11 2 1.6 Auto Components 22 3 1.0 Pharmaceuticals 56 3 0.7

Phlippnes 23 1 1.0 Software & Svcs 12 3 1.0 Containers & Packaging 23 4 1.3 Specialty Retail 57 -10 1.1

Israel 24 1 1.2 Commercial & Prof Svcs 13 -1 0.7 Media 24 -1 1.1 Water Utilities 58 -5 0.5

India (SP India 10) 25 1 0.0 Consumer Svcs 14 0 1.1 Electrical Equip 25 5 1.0 Household Products 59 -2 0.5

Mexico 26 -3 0.5 Telcom Svcs 15 -4 1.5 Comm Svcs & Supplies 26 -6 0.5 Food & Staples Ret 60 -5 0.6

US Mkt Cap Indexes Now Chg VRat Utilities 16 0 0.3 Automobiles 27 9 1.7 Beverages 61 -7 0.5

Russell MicroCap Index 1 1 1.0 Retailing 17 1 1.0 IT Svcs 28 7 1.0 Real Estate Mgmt&Dev 62 1 0.8

S&P SmallCap 600 Index 2 -1 1.2 Health Care Equip & Svcs 18 2 0.7 Internet & Catalog Ret 29 10 1.1 Txtils, Apprl & Lux Gds 63 1 1.1

Russell 2000 Index 3 0 1.1 Pharma, Biotech & Life Sci 19 4 0.7 Air Freight & Logistics 30 -2 0.5 Personal Products 64 1 1.2

US Value 4 0 1.0 Real Estate 20 -3 1.5 Internet Soft &Svcs 31 11 1.0 Multiline Retail 65 -5 1.7

DJ Wilshire 5000 Comp 5 0 1.0 Food Beverage & Tobacco 21 -2 0.3 Oil, Gas&Consmble Fuels 32 -10 0.6 Health Care Tech 66 0 1.6

S&P 100 Index 6 0 1.0 Cons Durables & Apparel 22 2 1.2 Marine 33 4 0.5

S&P 500 Index 6 1 1.0 Food & Staples Retailing 23 -2 0.6 Software 34 -2 0.8

US Growth 8 0 1.1 Household & Prsnl Prod 24 -2 0.6



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.

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