Tactical Playbook 10222012 - Ideafarm

Tactical Playbook
For the Week of October 22, 2012

Contents
Market Bias .......................................................................................................................................................................................... 2 Our Current Investment Allocation Recommendations. Tactical Convictions .......................................................................................................................................................................... 3 Watching for resolution of last weeks selloffs in a number of markets. Market Perspective: Equities ........................................................................................................................................................... 4 Moving to neutral on the SPY/EAFE spread. Market Perspective: US Equity Sectors .......................................................................................................................................... 6 Shifting bias on Technology to neutral. Market Perspective: US Equity Volatility ..................................................................................................................................... 9 VIX rose, but still experiencing an extended low period. Market Perspective: Rates & Currencies .................................................................................................................................. 11 Shorts in Treasuries and the Dollar. Market Perspective: Metals ............................................................................................................................................................12 Long setups in Metals, but watching short-term weakness. Market Perspective: Energy Commodities ................................................................................................................................13 Short Crude Oil and Long Natural gas. Market Perspective: Food Commodities ....................................................................................................................................14 Waiting on the sidelines. Macro Perspective .............................................................................................................................................................................15 Democracy in Action. Data Tables .........................................................................................................................................................................................23 Our Relative Strength Rankings & Tactical Dashboard. Please note that we will be holding our regular weekly webinar for clients today at 11:30 EST. As always, feel free to contact us with questions at info@waverlyadvisors.com or (607) 684-5300.
Copyright Waverly Advisors, LLC 2012. Please review Disclosures on the final page of this report.
Waverly Advisors, LLC 228 Cedar Street Corning, NY 14830 (607) 684-5300
Adam Grimes Chief Investment Officer Tactical Investments & Research grimes@waverlyadvisors.com Andrew Barber Chief Executive Officer Macroeconomic Research barber@waverlyadvisors.com
Contact Sales: info@waverlyadvisors.com (607) 684-5300
www.waverlyadvisors.com www.tacticalplaybook.com
Tactical Playbook October 22, 2012
Market Bias: Our Current Investment Allocation Recommendations

Short-Term (1-4 weeks) Equities Large Cap (S&P 500) Mid Cap (Russell 2000) Global Equities (relative) US Equity Sectors Basic Materials Consumer Goods Consumer Services Energy Financials Healthcare Industrials Technology Utilities Commodities Gold Silver Copper Crude Oil Natural Gas Sugar Grains Rates & Currencies * 30 Year Treasury Futures US Dollar Index EUR/USD EUR/JPY USD/GBP USD/JPY AUD/USD USD/CAD USD/CHF Neutral Neutral Neutral [Long SPY/EAFE] Neutral Neutral Bullish [Potential for Leadership] Neutral Bullish Bullish Neutral Bearish Neutral Bullish Long Long [Bullish] Short Long Neutral Neutral Short Bearish Long Neutral Bearish Neutral Neutral Neutral [Bearish] Bearish Intermediate-Term (2-12 months) Bullish Potential for Leadership Bullish [Neutral] Neutral Neutral Outperform Neutral Potential to Outperform Outperform Neutral Neutral [Outperform] Neutral Neutral Neutral Neutral Neutral Possible Inflection Neutral Neutral Neutral [Possible Inflection] Bearish Bullish Neutral Neutral Bullish Neutral Neutral Neutral Long-Term Weighting Overweight relative to non-equity Overweight relative to large-caps Neutral [Underweight] Underweight Market weight Overweight broad Sector Underweight Overweight Overweight (do not add) Market weight Market Weight [Overweight (do not add)] Underweight Market Weight Market Weight Market Weight Market Weight Market Weight Underweight Market Weight
Key to fields in this table:

We currently provide no long-term weightings for Rates & Currencies. A change in bias from the prior week is noted with colored bold text, followed by the prior week's ranking in [Brackets]. Tactical weightings should be used as tilts or adjustments to the reader's own allocation model; i.e., target weight is the "baseline" weighting given by that model; over- and under-weights should be seen as relative to that target weight.
*
Tactical Convictions: Our Current Best Ideas for Active Traders
arkets last week presented some complex challenges, but opportunities may lie hidden in the short-term noise. We have been watching a number of tactical setups that are clear on higher timeframesbullish setups in Equities, Metals, Natural Gas and a bearish pattern in the US Dollar. However, though these patterns are clear on higher timeframes, daily crosscurrents create a treacherous environment with many challenges for trade management. In addition, correlations have tightened between several asset classes, further magnifying potential risks for tactical traders as Equities, Metals, and Energies are primed to move in unison, for or against existing trade setups. We see the primary challenges as being in Equities and Precious Metals. Both asset classes have seen strong upthrusts on higher timeframes, followed by consolidation and reduced volatility. This is a pattern that often leads to another leg up, but, in this case, the pullbacks have been deep enough that many longs are nearing their stop points. This further reinforces the need for a disciplined approach to trade management, such as the one we use. Those who have entered these markets late, after the extended rallies (and long after our entry in Silver futures) are now faced with significant losses and difficult decisions. Those who entered at the correct point and who have reduced positions by taking partial profits (in essence, paying themselves as the market makes money available), can rest easy and make unemotional decisions with the remainder of their holdings. These, then, are the important inflections to watch this week. How will the weakness in Equities and Metals resolve? Will bears finally break through resistance and extend recent selloffs, or, as we think more likely, will these selloffs be reversed into potential long entries? Also worth watching is the weakness in Crude Oil, which is set to extend into another leg down, perhaps trimming as much as $10.00 from front month crude over the next 3-6 weeks. As always, our focus is on fastidious risk management and an unemotional focus on the realities of price actionwe trade what we see, not what we think is possible.
Tactical Conviction Notes - We currently hold the following tactical positions:

Date In
7/30/2012 10/4/2012 9/4/2012 10/18/2012 9/25/2012 6/15/2012
L/S
Short Long Long Long Short Long
Size
Two-thirds Full Two-thirds Full One-third One-third
Contract
Treasury Futures Eurocurrency Silver Futures Copper Futures Crude Oil Futures Natural Gas Futures
Price In
151 2/32 1.2905 31.10 3.74 92.25 3.198
Price Now
147 19/32 1.3030 32.09 3.63 90.60 3.911
Current Stop
150 16/32 1.2790 31.10 3.60 93.80 3.530
To Stop (ATR's)
2.5 2.4 1.4 0.6 1.5 3.3
Current Risk as % initial

Profit 34% Profit 58% 38% Profit
Initial Target
147 18/32 1.3239 32.80 3.98 88.20 3.496
Open P&L as % %R
2.3% 1.0% 3.2% (2.9%) 1.8% 22.3% 1.0x 0.4x 0.6x -0.5x 0.4x 2.4x
Total P&L (inc clsd)

0.9x 0.4x 0.7x -0.5x 0.8x 1.5x
Clients, please contact us at contact with any questions about how to implement any of these ideas in your portfolio. We can be reached at info@waverlyadvisors.com or (607) 684-5300 during normal US market hours. Additionally please note that we will be publishing details on our historical performance in the coming days.
Market Perspective: Equities

Bias S&P 500 Russell 2000 Global Equities (relative) NearTerm Neutral Neutral Neutral Intermediate-Term Bullish Potential for leadership Bullish Long-Term Overweight relative to nonequity Overweight relative to large-caps Neutral 1,370 1,320 1,270 1,220 Jul 12 Oct 12
Figure 1. S&P 500, Daily

1,470 1,420
Longer-term setup on Equities is solidly bullish. Watch for resolution of Fridays selloff. Exited SPY/EAFE this morning.
We continue to see excellent longer-term bullish setups in Equities, but short-term timing is uncertain. On one hand, this is nothing unusual Jan 12 Apr 12 longer-term traders (on weekly or monthly timeframes) take a long time to daily with 20XMA +/- Keltner Channels play out, and traders monitoring shorter timeframes will often be confused by noise. However, there are several factors that conspire to make this Figure 2. Russell 2000, Daily situation in Equities more important than most: the bullish setup could lead to a multi-year rally, so catching the upside is critical, the importance of Equities in monitoring a host of other markets and relationships, and the fact that many players are positioned aggressively long. These factors bring significant risks and challenges to these important trades. Fridays 3.0 standard deviation selloffs are significant in the historical record and cannot be casually dismissed. For market timers, market action in the first part of this week will be critical. Will the selloff extend? Will markets linger (consolidate) near Fridays lows, setting up another push down? Will the weakness be immediately reversed into a strong rally? The third scenario would be strongly indicative of bullish conviction, but we cannot predict the future. At this point, our attention shifts to risk management.
860 840
820
800 780 760 740 720
Jan 12 Apr 12 daily with 20XMA +/- Keltner Channels
Jul 12
Oct 12
Market Perspective: Equities (continued)

For allocators, long positions are fully justified, and weakness should be seen as an opportunity to increase those positions. Be aware that there is riskif the bullish setups fail, we will be forced to reduce exposure at lower price levels, effectively booking some losses. There is no other way. However, traders who can be more agile can respond to this situation with more flexibility. We will carefully monitor major indexes for an entry point over the next few weeks. Note that patterns in both the S&P and the Russell 2000 indexes are still within the confines of longer-term consolidations. Patience is needed.
Figure 3. DJ Europe Stock Index, Daily 270 260
250
240 230
Looking abroad, we note that many non-US Equity indexes show very 220 bullish patterns, and that weakening in the SPY/EAFE spread points to a possible end of the domestic outperformance. European and Asian 210 Jan 12 Apr 12 Jul 12 Oct 12 indexes show stronger outright setups, and we exited the remainder our daily with 20XMA +/- Keltner Channels SPY/EAFE trade. Traders still holding exposure here can look to reduce and exit in the first part of this week. This has been an excellent trade for us, held for well over a year, but market dynamics have shiftedwe only Figure 4. SPDR S&P 500 (SPY)/iShares MSCI EAFE Index Fund (EFA), Daily 285 want to be involved in trades that efficiently and effectively deploy our capital and risk. 280 In terms of sectors, we are changing our bias on Technology stocks:
275 270 265 260 255 250
Jan 12 Apr 12 daily with 20XMA +/- Keltner Channels Jul 12 Oct 12
245
Market Perspective: Market Perspective: US Equity Sectors

Bias DJ Basic Materials
Performance relative to S&P 500
Near-Term
Neutral
Intermediate-Term
Neutral
Long-Term
Underweight
43 38 33 28
The Basic Materials sector shows few attractive features and we hold underweight allocations to the broad sector. We see short-term bullish setups in the sector, but these are in context of longer-term weakness.
Basic Materials Leaders: SLW, WY, SCCO, FCX, IP, GG Basic Materials Laggards: PH, POT, VALE, DOW, ABX, DD
Jun 11
Oct 11
Feb 12 Neutral Neutral
Jun 12
Oct 12
Bias DJ Consumer Gds.

Near-Term
Intermediate-Term
Long-Term
Market weight
44 42 40 38 36
Jun 11 Oct 11 Feb 12 Bullish Jun 12 Oct 12
Consumer Goods require a more measured approach. Though we hold a market weight allocation to the broad sector, there may be attractive opportunities in individual names in this sector.
Consumer Goods Leaders: WSM, KORS, FOSL, PII, UA, MAT Consumer Goods Laggards: DECK, SBUX*, ORLY, JCI, LO, TPX
Bias DJ Consumer Serv.

Near-Term
Intermediate-Term
Outperform
Long-Term
Overweight
39 38 37 36 35 34 33 32
Consumer Services show excellent signs that support continued leadership. We hold overweight allocations to this sector.
Consumer Services Leaders: LAMR, IRM*, GPS, DISH*, LOW, ANN Consumer Services Laggards: GRPN, CMG*, APOL*, DLTR*, DLB, PCLN*
Oct 11 Feb 12 Jun 12 Oct 12
Jun 11
Listed in order. Arrows indicate overextension (up and down is now shown, and stars indicate strongly overextended.) We recommend generally avoiding entries while markets are overextended.
Market Perspective: US Equity Sectors (continued)

Bias DJ Oil & Gas 85 80 75 70 Energy Leaders: CNX, NOV, HAL, EOG, BTU, SLB Energy Laggards: WLT, APA, RDS.A, APC, CNQ, CVX
Oct 11 Feb 12 Jun 12 Oct 12 Performance relative to S&P 500
Near-Term
Neutral
Intermediate-Term
Neutral
Long-Term
Underweight
Energy stocks appear to be set for relative underperformance (perhaps dramatic underperformance) in the near- and intermediate-terms, and we hold underweight allocations to the sector. Shorts in individual names are possible.
65
60
Jun 11
Bias DJ Financials 37 35 33 31 29 Jun 11 Bias DJ Health Care

Performance relative to S&P 500 Performance relative to S&P 500
Near-Term
Bullish
Intermediate-Term
Potential to Outperform
Long-Term
Overweight
Financials are well set up for leadership; we hold overweight allocations here and recommend that our readers focus attention on the sector.
Financials Leaders: C, MS, GS, CS, JPM, ALL Financials Laggards: EQR, WLP, NYX, UNH, VNO, PSA Oct 11
Bullish
Feb 12 Near-Term
Jun 12 Intermediate-Term
Outperform
Oct 12 Long-Term
Overweight
Healthcare has been a true market leader for a year-and-a-half. We continue to hold overweights, but do not recommend adding at this time.
42 40 38 36 34 32
Jun 11 Oct 11 Feb 12 Jun 12 Oct 12
Healthcare Leaders: LLY, AGP, AMGN, NVS, BAX, JNJ* Healthcare Laggards: DGX*, LH*, GSK, ABT, COV, HCA
Market Perspective: US Equity Sectors (continued)

Bias DJ Industrials
Near-Term
Neutral
Intermediate-Term
Neutral
Long-Term
Market weight
39 37 35 33 31
Industrials show little to catch our interest. Market weight or slightly underweight allocations are justified here, and we anticipate broadly in-line performance from the sector over the intermediate term.
Industrials Leaders: LEN, RCL, TOL, DHI, FWLT, VMC Industrials Laggards: TYC*, CNW, EXPD, CAT, UPS, CSX
Oct 11 Feb 12 Bearish Jun 12 Oct 12
Jun 11
Bias DJ Technology
Near-Term
Intermediate-Term
Neutral
Long-Term
Market Weight
66 64 62 60 58 56 54
Technology stocks have shown enough weakness that we no longer see justification for overweight allocations. We are moving to market weight allocations on the sector, and will carefully monitor action over the next several weeks.
Technology Leaders: SNDK, SI, HON, PBI, JNPR, ETN Technology Laggards: HPQ, INTC, VMW*, A*, FFIV, SYNA
Jun 11
Oct 11
Feb 12
Jun 12
Oct 12
Bias DJ Utilities
Near-Term
Neutral
Intermediate-Term
Neutral
Long-Term
Underweight
36 34 32 30 28 26
Jun 11 Oct 11 Feb 12 Jun 12 Oct 12
Utility indexes represent a purely defensive allocation, in our opinion. Relative performance of Utilities is negatively correlated to overall market direction, and we hold an underweight allocation to the sector.
Utilities Leaders: KMP, EPD, SRE, TRP, D, EXC Utilities Laggards: FE, ED, ENB, EXC, D, TRP
Market Perspective: Equity Volatility

Figure 5. Equity Volatility: Realized vs. Implied
S&P 500 20DRV VIX 25 20 15
Figure 6. Equity Volatility: Realized vs. Implied

S&P 500 60DRV VXV (3M) 28
23
18
10
5 Jan 12 Apr 12 Jul 12 Oct 12 Jan 12 Apr 12 Jul 12 Oct 12
source: Waverly Advisors, CBOE source: Waverly Advisors, CBOE
13
ETF Volatility Dashboard Broad Equity Indices SPY S&P Dep Receipts IWM iShares Russell 2000 Index Tr QQQ PowerShares QQQ Trust Series 1 EFA iShares MSCI EAFE Index Tr US Equity Sectors XLE S&P Sel Energy Spdr Fund XLF S&P Sel Financial Spdr Fund XLK S&P Sel Technology Spdr Fund XLB S&P Sel Materials Spdr Fund XLI S&P Sel Industrial Spdr Fund XLY S&P Sel Consum Discretion'y Sp XLP S&P Sel Consum Staples Spdr Fu XLU S&P Sel Utilities Spdr Fund XLV S&P Sel Health Care Spdr Fund Commodities GLD SPDR Gold Trust USO United States Oil Fund LP
Close 143.39 81.85 65.68 54.14 73.83 16.11 29.29 37.09 36.79 46.58 35.71 37.11 40.6 166.97 33.34
WVScore 2.00 2.25 2.00 2.25 2.50 1.50 2.00 2.50 2.50 2.00 1.75 2.25 2.50 1.75 2.75
WV-Vol 2.00 2.50 2.00 2.50 2.00 2.00 2.00 2.00 2.00 2.00 1.50 1.50 1.50 1.50 2.50
WV-Tact 2.00 2.00 2.00 2.00 3.00 1.00 2.00 3.00 3.00 2.00 2.00 3.00 3.50 2.00 3.00
Change 0.00 0.00 0.00 0.25 0.00 0.00 (0.25) 0.00 0.00 0.00 0.00 0.00 (0.25) (0.50) 0.00
20DPrem 3.64 6.41 3.97 5.21 2.94 4.47 4.67 1.93 4.29 3.83 2.64 1.53 4.45 3.07 1.24
60DPrem 2.38 4.17 2.66 0.59 0.84 3.43 2.64 2.05 1.86 2.62 2.00 1.82 2.78 1.95 1.13
AvgVol (K) 1,000 393 349 61 63 234 53 38 51 7 16 19 16 276 104
CallOI (K) 7,593 1,946 1,976 914 450 2,863 319 212 381 106 203 204 154 3,389 988
PutOI (K) 15,608 4,705 2,705 1,328 829 2,787 365 400 661 280 331 179 287 1,499 767
WVScore A proprietary ranking combining volatility measures across multiple time horizons and our underlying specific quantitative market view. This helps screen for specific buy-write opportunities in individual names and/or sectors based on prevailing conditions and our tactical assessment of the instrument. Readings are scaled from 0 to 4, with 4 representing the most attractive opportunities.
10
Market Perspective: Equity Volatility (continued)

The VIX rose modestly last week as negative earnings announcements eroded broad market confidence. The biggest callout for the options market for the week is the low levels reached by the CBOE Implied Correlation Index (see chart). This index measures the correlation between the cost of S&P 500 options and the options of underlying components and it is now significantly below post credit crisis historical averages. This is reflective of divergence between primary components and the broad market in recent months, particularly in the technology sector. While volatility in the broad market was up (although still rather low by recent historical averages) on the week, there are several sub-sectors where the cost of mid-term protection still appears attractive relative to recent Jan 11 history.
Figure 7. Shifting Correlations
CBOE S&P 500 Implied Correlation Index (January 2013) CBOE S&P 500 Implied Correlation Index (January 2014) 90 85 80 75 70 65 60
55 50 45 40
Apr 11
source: CBOE
Jul 11
Oct 11
Jan 12
Apr 12
Jul 12
Oct 12
For call over writers, our WV scoring methodology shows the Industrial Figure 8. Buy Writes Still Performing Strong..... CBOE S&P500 2% OTM BuyWrite Index SPDR (XLI), Energy (XLE) and Basic Materials(XLB)sector SPDRs as the top sector candidates.
Definitions: WV score Waverlys proprietary ranking methodology for premium selling candidates that
incorporates both volatility metrics and Research views.
1250 1200 1150 1100 1050
CBOE SKEW index - measures the difference in implied volatilities for out-of-the-money S&P 500
options higher readings signal a greater demand for protection.
1000 950 900
S&P 500 put/call ratio - a high put/call ratio tells us that more puts are being traded relative to
calls. Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12
850 Oct 12
source: CBOE
11
Market Perspective: Rates & Currencies

Bias 30Y Treasury Fut. 30 Dollar Index US Year Treasury Futures Near-Term
Short Short Bearish
Intermediate-Term
Neutral Bearish Bearish
Figure 9. 30 Year Treasury Bonds (front month, continuous), Weekly

150
140 130
We continue to hold a partial short in Treasury Futures. We hold a long position in the EUR/USD, but other short Dollar positions are possible.
We continue to hold a partial short in longer-dated (30-year) Treasury futures. Traders not holding this position could look to enter the 30-Years on a breakdown below recent support (approximately 146 on the December contract) against a stop somewhere around 152. There is the possibility that we have caught a much longer-term trend change, though this should not be our expectation for this trade. Traders holding the remainder of this Jul 09 Jul 10 position with us can work a tight stop on what is left, as a rally against the weekly with 20XMA +/- Keltner Channels position could lead to sharp price appreciation. Longer-term players may wish to wait for a more decisive breakdown of bearish patterns to exit or Figure 10. Euro/US Dollar, Daily reduce short positions, but be careful of holding long-term positions without a clear plan. We hold a long position in the EUR/USD, which is, for us, essentially a short USD position. Fridays rally in the Dollar affected a number of other currencies, but, with the exception of the USD/CAD, patterns are intact across major currencies and most others could be an appropriate vehicle for this trade. We will simply work correct stops on the position, and watch for signs of further pattern degradation. Do not be influenced by narrative or any number of possibly irrelevant factorssimply trade the tactical pattern with correct risk management and let market action speak for itself.
120 110 100 Aug 11 Aug 12
1.350 1.325 1.300 1.275 1.250 1.225 1.200 Oct 12
Jul 12
12
Market Perspective: Metals

Bias Gold Copper Near-Term
Bullish (Long Silver) Long
Intermediate-Term
Neutral Neutral
Long-Term
Market weight Market Weight
Figure 11. Silver (COMEX front month, continuous), Daily

37.00
Bullish patterns and setups, but short-term complications. Long position in Copper is near our raised stop level.
35.00 33.00 31.00 29.00 27.00 25.00 Oct12
As expected, small 2-3 day bear flags in Precious Metals broke to the downside. The recent weakness threatens the integrity of the longer-term (weekly) bullish setups, so we near inflection points. Further weakness will shift our tactical bias back to neutral, albeit after booking nice profits on our long trades. (Again, we cannot overemphasize the importance of a disciplined approach to profit-taking on winning trades.) However, if this weakness is quickly bought and reversed, bulls will have found strong confirmation and motivation for a further rally and additional long Jan12 Apr12 Jul12 daily with 20XMA +/- Keltner Channels exposure. Guard against simply buying into this weakness without that confirmation, and beware any emotional bias or attachment to his market. Dont be a goldbug. Allocators have found confirmation in the recent rally, Figure 12. Copper (COMEX front month, continuous), Daily but the longer-term tactical setup is only slightly bullish, at best. Be careful of undue enthusiasm for Precious Metals. Weakness was even more serious in Copper, with the futures booking a 3.3 standard deviation loss Friday. We have raised the stop on our long position, eliminating approximately 40% of the initial risk in the trade. We would consider a stopout at this current level to be perfectly acceptable, and will then watch for a possible re-entry over the coming weeks. Another factor for traders to consider is that correlations between Metals and Equities have tightened. If you are trading Gold, Copper and Equities, do you understand the risk in your trading book?
Jan12 Apr12 daily with 20XMA +/- Keltner Channels Jul12
4.10 3.95 3.80 3.65 3.50 3.35 3.20 Oct12
13
Market Perspective: Energy Commodities

Bias
Crude Oil Natural Gas
Near-Term
Short Long
Intermediate-Term
Neutral Possible Inflection
Long-Term
Market weight Market weight
Figure 13. LS Crude Oil (NYMEX front month, continuous), Daily

113
107 101 95 89 83 77 Jan 12 Apr 12 daily with 20XMA +/- Keltner Channels Jul 12 Oct 12
We hold a tactical short in Crude Oil futures. Natural Gas is strong, but possibly short-term overextended.
We hold a short position in Crude Oil futures, and see potential downside to the 80.00 area on the November contract. Traders not holding this position could enter on weakness, against tight stops just over recent resistance. Traders on the short side of this market need to be wary of any sharp selloff that is quickly reversed, as this could lead to a very sharp snap back. The current environment justifies tight stops. Allocators working on longer timeframes should realize that Crude is sitting in the middle of a longer-term range, extending back to 2009, bounded by roughly 80.00 and 110.00. Making decisions in the middle of a range is not productive longer-term players have little to do here. Natural Gas continues to give short-term long entries that resolve quickly and well to the upside. Both traders and longer-term players should be holding heavy exposure to Natural Gas, but consider the risk management problem carefully. This is quite likely to be another step in a longer-term trend change process. If so, there could well be multi-year upside potential, and gains of several hundred percent. The potential is there, but timing remains problematic; it is exceedingly unlikely that a sharp uptrend will emerge from the current price area without considerably more time and work done here. For now, we recommend a two-tiered stop approach, perhaps using a near stop in the 3.30 area (November contract), and a further stop near this years lows. Be aware that Natty is perhaps overbought in the short-term, and do not be surprised to see a correction over the coming weeks. This selloff could bring short-term players to their stop levels (which is perfectly fine) without affecting longer-term setups in the slightest.
Figure 14. Natural Gas (NYMEX front month, continuous), Daily

3.70
3.45 3.20 2.95 2.70 2.45 2.20 Jan 12 Apr 12 daily with 20XMA +/- Keltner Channels Jul 12 Oct 12
14
Market Perspective: Food Commodities

Bias Sugar Grains Near-Term
Neutral Neutral
Intermediate-Term
Neutral Neutral
Long-Term
Underweight Market weight
Figure 15. Corn (CBOT front month, continuous), Weekly
Tactical patterns in Grains now tilted to the downside. Possible long setup in Wheat on the weekly charts.
815 765 715
A key part of our philosophy is to wait for the clearest and best tactical setups. Most of the time, markets exist in a state of relative equilibrium, price motion is more or less random, and no tactical edges exist. It is always possible to make convincing arguments for either long or short trades in these environments, but you may as well flip a coin as place a trade. Though there are small patterns that suggest possible shorts in Corn, longs in Wheat, and possible shorts in Soybeans, we do not see any good trading Jan 12 Apr 12 Jul 12 opportunities in the Grain Complex at this time. If we had to pick a trade, it daily with 20XMA +/- Keltner Channels would be to pursue the long position in Wheat, realizing that this is a trade that will play out over months and will require a very large stop. Since we Figure 16. . Sugar No. 11 (ICE front month, continuous), Weekly have no mandated exposure, we will simply wait on the sidelines for better opportunities to present themselves in Grains.
665 615 565

Oct 12
515
32 28 24 20 16 12 8 4
2009
2010 Weekly with 20XMA +/- Keltner Channels
2011
2012
15
Macro Perspective: Democracy in Action
"The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." Marcus Aurelius, (121AD to 180AD)
ny former resident of a Wall Street derivatives trading desk in the 1990's will be familiar with the acronym IBGYBG, a rapid fire retort spat out by salesmen to traders resistant to taking on a particular long-term exposure fraught with unknown risks. It stands for "I'll be gone, you'll be gone!" and was delivered as a cynical call to book the P&L upfront to capture it in this year's bonus and leave the persons residing in those seats in the years that followed to worry about valuation at maturity. Some people jokingly referred to this as "bonus arbitrage" in those days. In the wake of the credit crisis some now refer to it as fraud. In recent months we have noted that political risk has overtaken economic risk in the fear matrix of market sentiment. With limited organic growth catalysts and global central bank intervention reaching a presumed peak, the questions that cloud the horizon for investors are if governments will or will not summon the strength to implement politically difficult structural changes at home and furthermore if they will adopt a pragmatic or reactionary approach to international decisions. To date the dysfunction currently on display in the seats of power among the wealthy economies has been disheartening as the post-crisis has demonstrated convincingly that the emperor wears no clothes. Simply "kicking the can down the road" is no longer an option, and the seriousness of the situation makes any short-term solutions that fail to address underlying problems nothing short of IBGYBG on a global scale. A quick recap of where we stand in the political quagmire is in order: Next month will see a government change in the US. The success of the incumbent or the challenger will be decided by the portion of the population old enough to vote and not in prison who choose to exercise their right to do so, filtered through the electoral college. The voters will not be able to decide the final conclusion of the "fiscal cliff" dilemma, however, as partisan politics hold common sense hostage on Capitol Hill. In the near-term, tax and regulatory reform seem unlikely to get off the ground for the same underlying reason.
16
Macro Perspective: Democracy in Action (continued)

In China, a once-a-decade pantomime election will occur in the coming weeks. The new Central Politburo Standing Committee ushered in by the 18th National Congress will face the conundrums of external demand dependency, an impending demographic pitfall and a state-owned-enterprise model that after years of driving rapid growth appears poised to weigh ever heavier on global competitiveness. Due to the ascension process it is exceedingly unlikely that the new rgime will depart from the current's approach in the foreseeable future, with a focus on growth at all costs to prop up the social contract on their watch. The EU operates on a double set of democratic processes, as the often-aggressively partisan political elections on an individual national level can lead to stalemate on a Union- as impediments to consensus are created by conflicting national interests, the self-interests of elected officials, and the interests of the whole. Last week's economic summit serves as Exhibit A with finance ministers agreeing to reach an agreement in the future on a central banking authority and remaining silent on the crises endangering peripheral and southern economies. Spain needs to be bailed out and Greece needs to be cut free, but the respite bought by ECB intervention has been seized up by leaders as an opportunity to delay painful decisions. Japanese political dysfunction continues to set the global standard for democracies. Despite Prime Minister Noda's success in pushing through a modest consumption tax increase, constant cabinet reshufflings continue and the perpetual rolling of the nation's astronomical debt in the bond market provides a "fiscal cliff" of their own to Japanese politicians this year as new bonds must be issued to finance the budget. Two dominant global market narratives for the week ahead will be the Greek aid tranche and the EU economic summit that begins on Thursday. As the question of political solutions to economic stagnation is examined, its seems certain that the balance of power will remain shifted in favor of the creditor states despite the utopian and more democratic process envisioned by the Nobel committee. The big near-term macro question for Europe and European markets is whether Germany and France can be more malleable in the demands made of Spain than they have been to date for the peripherals. That answer will dictate the tone of expectations for recovery there and also the political axis of the nation itself.
The economies outlined above have vastly differing levels of underlying democratic process (almost none at all in the case of China) and the impact of an individual vote is different for each. It is important to note that the markets can be a form of democracy in themselves, when unburdened by excessive regulation. Some global markets have clearly cast their vote over the political futures of the major economies while others remain undecided:
Precious Metals -The resilience of Gold in recent years has been heavily tied to concerns over the expanding monetary base of the US and the global benchmark currency continues to fly off the presses. The gold bulls have voted and they expect that the US government will not be able to dig itself out of the current hole, relying instead on inflation and devaluation as a poor-man's solution while growth remains soft for the foreseeable future. The TIPS auction results last week showed that at least a portion of the US bond markets are of the same mind.
17

European Sovereign Bonds -This market remains an undecided voter as contracting rates for Spanish and Italian bonds on the short end of the curb (where the ECB bazooka is aimed) are complimented by rising CDS prices. Clearly many financial players do not have the privilege in the current regulatory/capital rgime to hold large naked exposures, but this decision to hedge bets still reflects a voter who has not yet committed to the candidate they are leaning towards. European Bank Stocks -The bounce back in European financial sector stocks is nothing less than the type of political zeal typically found in very young progressives and very old conservatives; unquestioning, unwavering and blind-to-criticism. Clearly this voter has thrown itself fully behind the current EU leaderships and the ECB. Chinese Stocks -A vote of confidence that Beijing will continue to do what feels good even if it shouldn't, trading problems tomorrow for today's growth targets. The Yuan -Another undecided as appreciation against the USD in recent months on QE fears have been matched by net outflows until September according to PBOC data. Japanese Yen -A vote to unwind the carry trade as rates lower in, and prospects dim for, commodity currencies like the Australian Dollar should not be construed as a vote of confidence for the future of debt-heavy, demographically-challenged Japan. This is a single-issue voter who only looks at how attractive current yields are abroad versus the cost of funding in the land of the rising sun, not what the future holds. US Equities -Just as corporate leaders have made up their minds about the prospects for future growth and the risks presented by the fiscal cliff by allowing cash levels to remain at ultra high historical levels rather than invest or hire before the election is resolved, stock market bulls have decided as well. Like Yogi Berra however, they have made it up their minds in both directions. This unregistered non-voter sees a victory for Obama as a victory for Fed doves and sustained easing/accommodative policy that will continue to inflate the value of financial assets (at least for a while). Meanwhile it expects a Romney administration would aggressively pursue policies aimed at growth and employment, cut taxes and regulation, and generally give corporate America a lot more of what it wants. A bullish argument of varying strength can be made in either scenario, therefore why bother overthinking instead of just rolling with momentum? As a side note, this prospective voter's opinion is more important to US media narratives than all others combined; so many conflicting editorials are written about its mood swings that all should be ignored.
The national election in the US and the Chinese power shift next month matter on many profound levels beyond market narratives of course, and even a strong and daring leader such as Marcus Aurelius would be profoundly challenged by the current growth and debt riddles facing the world economy. The fact that no nation mentioned above is likely to receive such a leader anytime soon suggests that IBGYBG will remain the order of the day in many if not all.
18
Our macro investment view has evolved into four key themes over the past 18 months: The US economy remains poised to outperform. USD relative strength is now being challenged by a potentially very significant expansion of the monetary base as the Fed deploys QE3 however. This complicates the investment implications of this underlying outperformance as it shifts asset values and impacts foreign trade. China's ability to protect and nurture growth domestically is in question and, regardless, new stimulus will have a much less profound impact on the global economy in the near-term than in prior cycles. The final day of reckoning has yet to pass for Europe, making any EUR denominated asset exposure fraught with risk unless actively managed. Global bond markets are fundamentally overvalued.
Put simply, China can't save the world, the EU can't fix what is broken without feeling much more pain, the US looks like the least dysfunctional of the primary wealthy economies (if only by a very modest margin) and bonds are significantly overpriced. We will keep you advised as our view of the markets develops and as we adjust market exposures.
19
Macro Perspective: US
Although employment signals have improved at a moderate pace in Figure 17. For Real? recent months, the underlying situation is less positive than the Existing Homes, Months of Supply (single family & condo) headline unemployment rate would suggest and recovery remains Existing Home Sales (single family & condo, millions) fragile. Additionally, uncertainty about the health of the global economy in general continues to cast a shadow over prospects for domestic growth. The arrival of QE3 should continue to help drive gains in financial assets and keep mortgage rates at historic lows, a net positive in the near term for consumer and investor sentiment. The longer-term impact of easing at this juncture, however, is debatable. Despite soft fundamentals, for now it remains our view that both the US economy and corporate sector are poised to maintain relative strength versus the rest of the wealthy world as the "muddle through" scenario continues to play out. We note however that the quantitative case supporting our tactical positioning has been weakened by sustained optimism in European equity markets 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 source: National Association of Realtors and we have now exited our SPY/EAFE position. Finally, with the national election looming, no resolution to the "Fiscal Cliff" narrative is possible, creating a drag on corporate and investor Figure 18. Industrial Activity US: ISM Mfg. Comp. Dallas Fed Mfg. (production) sentiment that has the potential to deteriorate rapidly (see Wild Richmond Fed Mfg. Cards). Last week was mixed for economic data in the US. Housing starts for September spiked unexpectedly to an annual pace of 872k, a 15% M/M increase with permits also rising sharply and upwards revisions for August. Meanwhile existing homes sales arrived in line with expectations at 4.75 million (-1.7 M/M, 11.1% Y/Y). Initial jobless claims for the week rose to 388k versus consensus forecasts of 365k and a prior (upwardly revised) 342k as the California impact was finally fully factored.
12 11 10 9 8 7
6 5 4 3 2012
30 60 50 40 30 20 10 0 -30 -45 15 0 -15
2007
2008
2009
2010
2011
2012
source: Institute for Supply Management, Federal Reserve Bank of Dallas
20
Macro Perspective: US (continued)

The week ahead will see a number of critical data points for market narratives with the FOMC announcement on Wednesday and Q3 GDP data scheduled for release on Friday. Expectations are for no significant change in posture from the Fed as QE3 ramps up while consensus forecasts for a marginal uptick to 1.9% Q/Q. New sales on Tuesday and pending homes on Wednesday will keep the discussion of whether or not housing has definitively turned around in headlines while University of Michigan sentiment on Friday will be closely watched in light of the spike registered in the initial reading earlier in the month. As with the rest of the world, this is PMI week for the US with regional manufacturing indices reported by the Richmond, Dallas and Kansas City Feds ahead of next week's Dallas and ISM releases. Note that last month's ISM release beat forecasts at an expansionary level of 51.5 with new orders at 52.3 and production still in the red at 49.5.
Figure 19. Yield Curve
19-Oct-12 25-Jul-12 27-Oct-11 3.5 3.0 2.5 2.0 1.5 10Y 2Y 1.0 0.5 0.0 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Figure 20. Sentiment at the Cash Register....

University of Michigan Consumer Sentiment University of Michigan Consumer Sentiment -Expectations 85 80 75 70 65 60 55 50 2007 2008
source: University of Michigan
2009
2010
2011
45 2012
21
Macro Perspective: Europe

We anticipate the higher volatility regime in European financial markets will continue for the near-term and we maintain our negative intermediateterm macro outlook for the eurozone. Our earlier bullish USD bias was completely undermined by the market impact of the ECB's action to control the sovereign yields of weak EU economies coupled with the impact of US QE3. While the sustainability of euro strength will depend in large part on economic data in the coming months, for now significant optimism remains in markets there despite the fact that words have been louder than actions to date. Note that we now feel that a Greek exit is largely priced in and should elicit manageable volatility, but that a Spanish bailout is inevitable and brings a host of unknowns to the table for markets. Figure 21. Yield vs. CDS
IBOXX ITALY 1-3 YRS CDS Italy 3Y Yield 100 98 96 94 92 90 88 2012 9 8 7 6 5 4 3 2 1
The EU summit concluded on Friday with little to show for two days work. The much-needed banking supervision mandate was rolled back with a vague pledge 2007 2008 2009 to an "objective of agreeing on the legislative framework" by the New Year. source: Thomson Reuters More important from a market narrative standpoint, no progress was acknowledged for the management of the ongoing peripheral/Spain/Italian debt Figure 22. The Euro crisis. A bright spot for the week was German ZEW sentiment readings which EUR vs. USD registered sequential gains, albeit from a low base. The decision by Moody's not to downgrade Spain (yet), elicited a bullish market reaction in the short end of the sovereign curve (the focus of the ECB "Bazooka") and the subsequent combined EUR 4.61 billion bond auctions that saw yields contract significantly on higher demand. As we noted last Thursday, the risk now is that the bond market lulls EU leadership into the same fantasies held by the administration in Madrid: We reiterate that a full bailout for Spain appears inevitable. The week ahead is likely to be dominated by further political debate over the Spanish and Greek dilemmas, but note that PMI data on Wednesday will be critical for market narrative with marginal sequential expansion expected for both the eurozone and the primary economies.
Oct 11 Jan 12
source: Thomson Reuters
2010
2011
EUR vs. GBP 0.8 0.8 0.8 0.8 0.7 0.7 0.7 Oct 12 1.29 1.27 1.25 1.23 1.21 1.19 1.17 1.15
Apr 12
Jul 12
22
Macro Perspective: Asia

China: Prior to last week China was the last place left where "bad-news-is- Figure 23. Looking for Confirmation of a Rebound good" as evidenced by bullish quantitative set-ups for equities on China: HSBC Manufacturing PMI -New Orders expectations of fresh rounds of targeted stimulus in the near-term. Bullish China: HSBC Manufacturing PMI -Employment China: HSBC Manufacturing PMI -Output September activity measures (potentially heavily skewed by the midAutumn holiday's calendar placement in 2011) now makes fresh stimulus less likely however. We maintain concerns over profound structural issues that may weigh against longer-term growth prospects but recognize that Beijing's aggressive moves to throw money at problems are yielding some results for now. Note that the coming month will be heavily focused on the once-a-decade transition of government. Today's discussions at the cabinet level of sweeping reform are very welcome, but vague. Last week a slew of fresh data points for China were released. 3Q GDP registered at 7.4% Y/Y, in-line with consensus forecasts, while September industrial production, retail sales and fixed investments all exceeded expectations. This strength in September activity measures, combined with official news agency commentary from the State Council this assuring that growth targets for the year will be met, 2008 2009 2010 2011 2012 are clear near-term bullish signals for Chinese equities and other financial assets. source: Thomson Reuters Housing data issued by NBSC last week indicated further modest rebounds, but at 0.1%M/M (-1.2% Y/Y) still too small to suggest any reason for Beijing to take Figure 24. Grim any additional curbing action. Finally, note that PBOC September currency flows Japan: Exports (% Change Y/Y) Japan: Exports to China (% Change Y/Y) data released on Friday showed that the flight of capital reversed for the month Japan: Exports to Western Europe (% Change Y/Y) with CNY levels up by 131 billion. The biggest narrative driver on the calendar for the week ahead is PMI due out on Tuesday night with consensus forecasts looking for sequential improvement. Japan: We retain a negative long-term view on the Japanese economy, and any impact from disaster-recovery public investment has been fully offset by contracting external demand. Note that tensions with China threaten to further undermine PROC bound export levels. Like an exaggerated version of Europe and the US, it is a lack of political will that prevents necessary reforms to increase demand. Last night's trade data release was abysmal with exports contracting by 10.3% Y/Y (-14% Y/Y for China). In his address BOJ Governor Shirakawa vowed to continue easing and intervene in currency markets if necessary. Note that National and Tokyo specific CPI levels for August and September respectively will be announced on Friday with 2007 expectations for continued Y/Y mid single-digit contraction.
62 58 54 50 46 42
38
80 60 40 20 0 -20 -40
2008
source: Bloomberg
2009
2010
2011
-60 2012
23
Macro Perspective: Commodities

While we continue to manage commodity exposures tactically, we do have Figure 25. Pressure at the Pump: Starting to Subside? a number of longer-term perspectives on various segments of the commodity markets that inform our process. Our intermediate and longterm analysis leads us to a few conclusions: Despite recent weakness on slow global growth prospects, our long-term view on oil remains largely unchanged with expectations that the asymmetrical demand structure in the developing world means that consumption there will be more resilient than in the first world. In the US, failure to invest in infrastructure will continue to create dependency on Brent indexed crude. We additionally anticipate that the Brent/WTI spread will remain historically wide for the foreseeable future. Natural Gas wells are no longer being drilled in PA or ND at anywhere near the pace of two years ago, while wage inflation in China may set the stage for increased domestic industrial activity. Long-term prospects for gas are therefore shifting to a more bullish bias for us.
115 90 65 40 15 -10
Jul 12
Oct 12
September import measures for base metals in China surged with Iron Figure 26. WTI/Brent Spread Remains Wide ore, Copper and Copper scrap up by 4%, 11% and 5% M/M Crude Spread WTI- Brent Crude Spread WTI- Brent (3MMA) respectively. Anecdotal evidences suggests that arbitrage rather than enduser restock as a primary driver for copper imports and, furthermore, 5 believe that this rebound is unlikely to sustain at these levels (unlike Iron 0 ore which appears to be directly linked to probably unnecessary, production increases at steel mills). -5 While this season's drought conditions in the US sparked a huge swing in grain markets, the multi-seasonal horizon also holds bullish clues. Loud protests by international bodies over the damage inflicted by agricultural subsidies and export freezes in poor nations are accompanying the current spike in food costs just as they have in the prior two spikes in recent year. Changing weather and bad government policies in the developing and developed economies have set the stage for bullish set2007 ups to occur with greater frequency over the long-term.
-10 -15 -20
-25
2008
source: Thomson Reuters
2009
2010
2011
-30 2012
24
Macro Perspective (continued)
WILD CARDS: Outlier event-risk factors we are actively tracking

History tells us that it is important not to discount the raw power of willful idiocy driven by partisan political considerations. The presidential election stands as a potentially polarizing event which leads the losing side to entrench themselves in petty one-upmanship, making agreement impossible and causing taxes to increase in 2013 with the ensuing potential drag on GDP estimated as high as 3.5% by some. While a last-minute extension is the most likely outcome, the possibility of a disaster must remain on all investors' radars. The ECB bond-buying facility announcement has taken pressure off the peripheral economies public sovereign yields and provided breathing room for financials with remaining exposure. Uncertainty remains over the banking sectors of economically weaker Union states, however, as underscored by Moody's report last month that indicated Spanish banks will ultimately require nearly twice the capital injection claimed by Madrid. It is also of note that the new ECB short-term bond facility allows for a pass-through to the banking sector via governments that, while creating a solution, also potentially complicates matters severely in a systemic event later. European banks have raised capital and shed assets, but they are far from out of the woods just yet. In a zero rate world, the sudden appearance of inflationary pressure remains an apparition in the minds of every policy maker. The most recent ZEW inflation expectations in Germany and record low yields at last week's USD 7 billion TIPS auction in the US indicates the amount of anxiety permeating western economies. Recent signs of modest resilience in property markets fanned fears that current round of easing actions have started to cause a trickle down into the opaque universe of regional and informal lenders that were integral to the initial real estate bubble. Note that there has been a pickup in recent months of anecdotal reports of complete illiquidity in some smaller regional property markets. In this set-up, concerns of a collapse in Chinese real estate valuations or a sudden emergence of massive hidden non-performing loans continues to bubble under the surface of all discussions of the Chinese economy. While official figures show nonperforming levels at primary commercial banks are still insignificant, anecdotal discussion of defaults by property developers and regional-level capacity or infrastructure projects persist. When the governmental transition is complete next month, it is possible that Beijing will acknowledge more issues. For now however, the "extend & pretend" approach to troubled loans appears to be the preferred strategy.
US FISCAL CLIFF
EUROPEAN FINANCIAL SECTOR
RAPID INFLATION
CHINA ASSET/DEBT SHOCK
25
Data Table: Equities - Relative Strength Rankings and One Week Changes in Rankings
US Market Cap Indexes S&P 100 Index S&P 500 Index Dow Jones Wilshire 5000 Comp S&P SmallCap 600 Index Russell 2000 Index iShs Russell MicroCap Index Industry Financials TR Health Care TR Telecommunications TR Consumer Services TR Oil & Gas TR Utilities TR Industrials TR Basic Materials TR Consumer Goods TR Technology TR SuperSectors Media Construction and Matrls Insurance Banks Financial Service Healthcare Telecommunication Retail Oil & Gas Real Estate TR Basic Resources Utilities Real Estate Industrial Goods Non-cyclical Good Food & Beverage Chemicals Automobiles & Parts Technology Now 1 2 3 4 5 6 Now 1 2 3 4 5 6 7 8 9 10 Now 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Chg 0 0 1 2 0 -3 Chg 3 -1 -1 -1 0 2 -1 1 -2 0 Chg 0 0 1 1 2 -3 -1 0 0 1 4 2 3 -4 -2 -4 0 1 -1 Rat 1.6 1.6 1.6 1.4 1.4 1.4 Rat 1.2 1.8 1.6 1.5 1.2 1.3 1.4 1.5 1.3 1.8 Rat 1.2 1.2 1.8 1.0 1.3 1.8 1.6 1.2 1.2 1.3 1.1 1.3 1.3 1.4 1.4 1.2 1.7 1.1 1.8 Sectors Wireless Comm Media Construction and Matrls Forest Products Pharmaceuticals & Bio Nonlife Insurance Banks General Financial General Industrials Insurance, Life Household Goods Leisure Goods General Retailers Oil & Gas Producers Oil Equip Servic & Distr Fixed Line Commun Electric Utility Industrial Metals Real Estate Gas Water Multiutilities Support Services Food Producers Food & Drug Retailers Health Care Equip & Serv Mining Aerospace Personal Goods Chemicals Industrial Engineering Beverage Industrial Trans Electronic & Electrical Tobacco Automobiles & Parts Software & Computer Serv Cyclical Goods Tech Hardware & Equip Now 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Chg 0 0 3 -1 0 1 1 1 -5 8 2 5 -3 0 7 -4 9 16 8 5 -5 -1 -4 -13 -1 2 3 3 4 -7 1 -3 -13 2 -20 -1 0 Rat 0.8 1.2 1.2 1.2 1.9 1.8 1.0 1.3 1.6 1.6 1.3 1.3 1.2 1.3 1.1 1.6 1.2 1.1 1.3 1.3 1.2 1.4 1.5 1.2 0.9 1.4 1.5 1.7 1.2 1.0 1.0 1.5 1.4 1.1 1.6 1.7 1.8 Market Greece Denmark Spain Mexico Italy Philippines Germany Belgium Switzerland France Netherlands Europe Norway Dubai Hong Kong Australia UK Singapore US (SP500) Portugal Finland Malaysia Canada Ireland South Korea Israel Mid East / Africa Russia Indonesia Latin America Chile India Taiwan South Africa Japan Brazil Shanghai China Broad Mkt Shenzhen Now 1 2 3 4 5 6 7 8 8 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Chg 0 2 28 1 20 -4 4 -5 -2 14 2 5 -5 -5 -8 -2 1 -8 -7 12 9 -7 -2 -2 -6 7 -8 6 -6 -2 -5 -16 -6 -5 2 -1 -1 0 0 Rat 0.6 0.7 1.2 1.0 1.0 0.8 0.9 1.1 1.1 0.9 0.9 1.0 0.8 1.0 0.3 1.0 0.8 0.8 1.6 1.2 0.9 0.8 1.0 1.0 0.7 0.6 1.2 0.7 0.7 0.8 1.3 0.8 0.7 1.3 0.5 0.6 0.6 0.7 0.7
This table shows a number of markets, sectors and industries ranked according to our proprietary relative strength measure. By combining multiple lookback periods in a rigorously-tested quantitative framework, this tool overcomes many of the limitations of traditional relative strength measures. The first column shows the markets rank within its group, the second shows the change of the ranking over the past week, and the third shows the ratio of the 1 week and 1 quarter realized volatilities.
26
Data Table: Tactical Dashboard for Our Primary Markets

US Market Cap - Based Indexes
S&P SmallCap 600 Index iShs Russell MicroCap Index Dow Jones Wilshire 5000 Comp S&P 500 Index iShares Russell 2000 Index Tr S&P 100 Index Dow Jones Industrial Average Utilities Financials Oil & Gas Basic Materials Telecommunications Consumer Goods Consumer Services Industrials Technology Health Care Name Last 458.80 51.04 14,910.98 1,433.19 81.85 657.11 13,343.51 455.70 495.23 1,018.02 445.16 316.77 592.60 548.55 492.07 832.55 602.13 147.5625 132'12.5 0.99 79.30 103.31 1.60 1.03 1.30 1724.00 32.10 3.64 3.617 90.44 %Chg (1.7%) (2.1%) (1.6%) (1.7%) (2.0%) (1.7%) (1.5%) (0.7%) (1.2%) (1.5%) (2.1%) (1.7%) (1.3%) (1.6%) (1.7%) (2.4%) (1.7%) 0.8% 0.3% 0.7% 0.0% (0.3%) (0.2%) (0.3%) (0.3%) (1.2%) (2.3%) (2.8%) 0.8% (2.3%) StDevCl -2.3 -2.7 -2.7 -2.8 -2.8 -2.9 -3.0 -1.4 -1.6 -1.7 -2.0 -2.4 -2.4 -2.5 -2.5 -2.6 -2.8 1.5 1.3 1.8 0.2 -0.5 -0.6 -0.7 -0.7 -1.7 -2.0 -3.3 0.4 -1.3 OB/OS 18 -5 30 30 21 24 29 81 66 54 56 22 39 40 46 -22 44 39 29 86 87 83 31 56 65 17 9 23 85 31 52wkRet 13.5% 21.1% 17.8% 17.9% 17.6% 19.5% 15.6% 13.2% 28.7% 12.0% 13.6% 27.8% 15.7% 26.9% 20.5% 12.6% 29.9% 7.5% 5.4% (2.7%) 1.2% (3.8%) 0.4% 0.0% (4.9%) 5.7% 4.8% 17.4% (22.4%) 0.3% Vol20 12.9% 13.9% 11.5% 11.4% 13.5% 11.3% 9.9% 8.6% 13.0% 15.6% 18.5% 13.0% 10.0% 11.8% 12.6% 16.8% 11.9% 9.1% 3.9% 7.1% 3.9% 8.8% 5.7% 7.5% 7.0% 11.6% 20.6% 16.8% 36.7% 29.8% Vol90 15.7% 17.1% 13.2% 13.0% 15.9% 12.6% 11.9% 9.5% 14.9% 19.6% 20.4% 13.4% 11.0% 12.4% 15.6% 17.8% 12.0% 9.3% 4.2% 6.9% 6.0% 10.9% 6.5% 9.2% 9.1% 15.2% 27.3% 21.7% 48.2% 31.6% VolRatio 0.8 0.8 0.9 0.9 0.9 0.9 0.8 0.9 0.9 0.8 0.9 1.0 0.9 1.0 0.8 0.9 1.0 1.0 0.9 1.0 0.6 0.8 0.9 0.8 0.8 0.8 0.8 0.8 0.8 0.9 Ctrend Conf Up Conf Up Conf Up Conf Up Conf Up Conf Up Conf Up Conf Up* Conf Up Conf Up Conf Up Trans Up Conf Up Conf Up Conf Up Trans Down* Conf Up Conf Down Conf Down Conf Down Conf Up Conf Up Conf Up Trans Down Conf Up Trans Up Trans Up Conf Up Trans Up Trans Down Ltrend Up Up Up Up Up Up Up Up* Up Up Up Up Up Up Up Down* Up Down Down ??* Up Up Up Down Up Up Up Up Up Down Strend Up Up Up Up Up Up Up Up Up Up Up Down Up Up Up Up Up Down Down Down Up Up Up Up Up Down Down Up Down Up
Dow Jones US Industry Indexes (Total Return)
Interest Rate Futures Currencies
30 Yr U.S.T Bonds CC [Dec12] 10 Yr U.S. T Notes CC [Dec12] US Dollar / Canadian Dollar US Dollar / Japanese Yen Euro / Japanese Yen British Pound / US Dollar Aust Dollar / US Dollar Euro / US Dollar
COMEX Metals (Futures)

Gold CC [Dec12] Silver CC [Dec12] Copper CC [Dec12]
Natural Gas CC [Nov12] Crude Oil CC [Dec12] continued next page
NYMEX Energy (Futures)
27
Data Table: Tactical Dashboard for Our Primary Markets (continued)

Name Last 20.23 2489.00 161.65 76.88 872.50 761.50 1534.25 %Chg 2.2% 2.1% 1.9% (1.1%) 0.5% 0.1% (0.7%) StDevCl 1.3 1.3 0.9 -0.7 0.2 0.0 -0.5 OB/OS 38 69 29 89 53 60 36 52wkRet (20.9%) (4.9%) (33.8%) (10.2%) 23.5% 24.1% 34.6% Vol20 27.9% 27.3% 32.8% 24.3% 29.5% 33.3% 23.6% Vol90 28.7% 28.2% 35.1% 30.5% 35.1% 35.5% 28.8% VolRatio 1.0 1.0 0.9 0.8 0.8 0.9 0.8 Ctrend Conf Down Trans Down Conf Down Conf Up Trans Down* Trans Down Trans Down Ltrend Down Down Down Up Down Down Down Strend Down Up Down Up Up* Up Up
NYBOT Softs (Futures)

Sugar No. 11 CC [Mar13] Cocoa CC [Dec12] Coffee C CC [Dec12] Cotton No. 2 CC [Dec12]
CBOT Grain (Futures)

Wheat CC [Dec12] Corn CC [Dec12] Soybeans CC [Nov12]
Key to fields in this table:

The sector indices are Dow Jones total return indexes. Futures contracts are continuous contracts which roll with open interest and volume. CC Last %Chg StDevCl OB / OS 52wkRet Vol20 Vol90 VolRatio Ctrend Ltrend Strend * continuous contract most recent price percent change from previous days close the close expressed as a standard deviation of the past 20 trading days. our proprietary overbought /oversold indicator. 50 is a neutral reading. 1 year simple percentage return Annualized realized volatility calculated from the past 20 trading days Annualized realized volatility calculated from the past 90 trading day Ratio of Vol20 / Vol90. Values less than 1 show that the market is in a period of contracting volatility, while values greater than 1 show volatility expansion. composite trend indicator trend of the longer-term momentum (2-3M) trend of the short-term momentum (1W -1M) status changed at yesterday's close
28
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Waverly Advisors, LLC 228 Cedar Street Corning, NY 14830 (607) 684-5300
Forefactor Inc. 1 Yonge Street, Suite 1801 Toronto, ON, Canada M5E 1W7 (416) 907 0431
Disclosures:
Tactical Playbook ("The Report") is a newsletter published by Waverly Advisors, LLC ("Waverly Advisors"). Receipt of The Report is subject to terms of service: http://www.waverlyadvisors.com/pages/terms_of_service Waverly Advisors uses reasonable care in preparing and publishing The Report. 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 tacticalplaybook.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 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. Copyright Waverly Advisors, LLC 2012. 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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Tactical Playbook

For the Week of October 22, 2012

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Tactical Playbook October 22, 2012

Market Bias: Our Current Investment Allocation Recommendations

Key to fields in this table:

Tactical Playbook October 22, 2012

Tactical Convictions: Our Current Best Ideas for Active Traders

Tactical Conviction Notes - We currently hold the following tactical positions:

Current Risk as % initial

Total P&L (inc clsd)

Tactical Playbook October 22, 2012

Market Perspective: Equities

Figure 1. S&P 500, Daily

Jan 12 Apr 12 daily with 20XMA +/- Keltner Channels

Tactical Playbook October 22, 2012

Market Perspective: Equities (continued)

Tactical Playbook October 22, 2012

Market Perspective: Market Perspective: US Equity Sectors

Feb 12 Neutral Neutral

Bias DJ Consumer Gds.

Bias DJ Consumer Serv.

Tactical Playbook October 22, 2012

Market Perspective: US Equity Sectors (continued)

Bias DJ Financials 37 35 33 31 29 Jun 11 Bias DJ Health Care

Tactical Playbook October 22, 2012

Market Perspective: US Equity Sectors (continued)

Tactical Playbook October 22, 2012

Market Perspective: Equity Volatility

Figure 6. Equity Volatility: Realized vs. Implied

AvgVol (K) 1,000 393 349 61 63 234 53 38 51 7 16 19 16 276 104

Tactical Playbook October 22, 2012

Market Perspective: Equity Volatility (continued)

1250 1200 1150 1100 1050

1000 950 900

Tactical Playbook October 22, 2012

Market Perspective: Rates & Currencies

Figure 9. 30 Year Treasury Bonds (front month, continuous), Weekly

120 110 100 Aug 11 Aug 12

1.350 1.325 1.300 1.275 1.250 1.225 1.200 Oct 12

Jan 12 Apr 12 daily with 20XMA +/- Keltner Channels

Tactical Playbook October 22, 2012

Market Perspective: Metals

Figure 11. Silver (COMEX front month, continuous), Daily

35.00 33.00 31.00 29.00 27.00 25.00 Oct12

4.10 3.95 3.80 3.65 3.50 3.35 3.20 Oct12

Tactical Playbook October 22, 2012

Market Perspective: Energy Commodities

Figure 13. LS Crude Oil (NYMEX front month, continuous), Daily

Figure 14. Natural Gas (NYMEX front month, continuous), Daily

Tactical Playbook October 22, 2012

Market Perspective: Food Commodities

Figure 15. Corn (CBOT front month, continuous), Weekly

815 765 715

665 615 565

2010 Weekly with 20XMA +/- Keltner Channels

Tactical Playbook October 22, 2012

Macro Perspective: Democracy in Action

Tactical Playbook October 22, 2012

Macro Perspective: Democracy in Action (continued)

Tactical Playbook October 22, 2012

Macro Perspective: Democracy in Action (continued)