Tactical Playbook 10222012_ideafarm

7/30/2019 Tactical Playbook 10222012_ideafarm

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Copyright Waverly Advisors, LLC 2012. Please review Disclosures on the final page of this report.

Tactical PlaybookFor the Week of October 22, 2012

Contents

Market Bias .......................................................................................................................................................................................... 2Our Current Investment Allocation Recommendations.

Tactical Convictions .......................................................................................................................................................................... 3Watching for resolution of last weeks selloffs in a number of markets.

Market Perspective: Equities ........................................................................................................................................................... 4Moving to neutral on the SPY/EAFE spread.

Market Perspective: US Equity Sectors.......................................................................................................................................... 6Shifting bias on Technology to neutral.

Market Perspective: US Equity Volatility ..................................................................................................................................... 9VIX rose, but still experiencing an extended low period.

Market Perspective: Rates & Currencies .................................................................................................................................. 11Shorts in Treasuries and the Dollar.

Market Perspective: Metals ............................................................................................................................................................ 12Long setups in Metals, but watching short-term weakness.

Market Perspective: Energy Commodities ................................................................................................................................ 13Short Crude Oil and Long Natural gas.

Market Perspective: Food Commodities .................................................................................................................................... 14Waiting on the sidelines.

Macro Perspective .................................................................................................................................................. ........................... 15Democracy in Action.

Data Tables .............................................................................................................................................................. ........................... 23Our 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 [email protected] or (607) 684-5300.

Waverly Advisors, LLC

228 Cedar StreetCorning, NY 14830

(607) 684-5300

Adam GrimesChief Investment Officer

Tactical Investments & [email protected]

Andrew BarberChief Executive Officer

Macroeconomic [email protected]

Contact Sales:

[email protected](607) 684-5300

www.waverlyadvisors.comwww.tacticalplaybook.com


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Tactical PlaybookOctober 22, 2012 2


Market Bias: Our Current Investment Allocation Recommendations

Short-Term (1-4 weeks) Intermediate-Term (2-12 months) Long-Term Weighting

Equities

Large Cap (S&P 500) Neutral Bullish Overweight relative to non-equityMid Cap (Russell 2000) Neutral Potential for Leadership Overweight relative to large-caps

Global Equities (relative) Neutral [Long SPY/EAFE] Bullish [Neutral]

Neutral [Underweight]US Equity Sectors

Basic Materials Neutral Neutral UnderweightConsumer Goods Neutral Neutral Market weightConsumer Services Bullish [Potential for Leadership] Outperform Overweight broad SectorEnergy Neutral Neutral UnderweightFinancials Bullish Potential to Outperform OverweightHealthcare Bullish Outperform Overweight (do not add)Industrials Neutral Neutral Market weight

Technology Bearish Neutral [Outperform] Market Weight [Overweight (do not add)]Utilities Neutral Neutral Underweight

CommoditiesGold Bullish Neutral Market WeightSilver Long Neutral Market WeightCopper Long [Bullish] Neutral Market WeightCrude Oil Short Neutral MarketWeightNatural Gas Long Possible Inflection Market WeightSugar Neutral Neutral UnderweightGrains Neutral Neutral Market Weight

Rates & Currencies *

30 Year Treasury Futures Short Neutral [Possible Inflection]US Dollar Index Bearish BearishEUR/USD Long BullishEUR/JPY Neutral NeutralUSD/GBP Bearish NeutralUSD/JPY Neutral Bullish

AUD/USD Neutral NeutralUSD/CAD Neutral [Bearish] NeutralUSD/CHF Bearish Neutral

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 priorweek'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.


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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 throughresistance 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:

Current To Stop Current Risk Initial Open P&L Total P&L

Date In L/S Size Contract Price In Price Now Stop (ATR's) as % initial Target as % %R (inc clsd)7/30/2012 Short Two-thirds Treasury Futures 151 2/32 147 19/32 150 16/32 2.5 Profit 147 2.3% 1.0x 0.9x

10/4/2012 Long Full Eurocurrency 1.2905 1.3030 1.2790 2.4 34% 1.3239 1.0% 0.4x 0.4x

9/4/2012 Long Two-thirds Silver Futures 31.10 32.09 31.10 1.4 Profit 32.80 3.2% 0.6x 0.7x

10/18/2012 Long Full Copper Futures 3.74 3.63 3.60 0.6 58% 3.98 (2.9%) -0.5x -0.5x

9/25/2012 Short One-third Crude Oil Futures 92.25 90.60 93.80 1.5 38% 88.20 1.8% 0.4x 0.8x

6/15/2012 Long One-third Natural Gas Futures 3.198 3.911 3.530 3.3 Profit 3.496 22.3% 2.4x 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 [email protected] 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.

M


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Market Perspective: Equities

BiasNear-Term

Intermediate-TermLong-Term

S&P 500 Neutral BullishOverweight relative to non-

equity

Russell 2000 Neutral

Potential for

leadership

Overweight relative to

large-capsGlobal Equities(relative)

Neutral Bullish Neutral

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

longer-term traders (on weekly or monthly timeframes) take a long time to

play out, and traders monitoring shorter timeframes will often be confused

by noise. However, there are several factors that conspire to make this

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.

Figure 1. S&P 500, Daily

Figure 2. Russell 2000, Daily

1,220

1,270

1,320

1,370

1,420

1,470

Jan 12 Apr 12 Jul 12 Oct 12

daily with 20XMA +/- Keltner Channels

720

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760

780

800

820

840

860




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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.

Looking abroad, we note that many non-US Equity indexes show very

bullish patterns, and that weakening in the SPY/EAFE spread points to a

possible end of the domestic outperformance. European and Asianindexes show stronger outright setups, and we exited the remainder our

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

want to be involved in trades that efficiently and effectively deploy our

capital and risk.

In terms of sectors, we are changing our bias on Technology stocks:

Figure 3. DJ Europe Stock Index, Daily

Figure 4. SPDR S&P 500 (SPY)/iShares MSCI EAFE Index Fund (EFA), Daily

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Market Perspective: Market Perspective: US Equity SectorsBias Near-Term Intermediate-Term Long-TermDJ Basic Materials Neutral Neutral Underweight 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

Bias Near-Term Intermediate-Term Long-TermDJ Consumer Gds. Neutral Neutral Market weight 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 Near-Term Intermediate-Term Long-TermDJ Consumer Serv. Bullish Outperform Overweight 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*

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33

38

43

Jun 11 Oct 11 Feb 12 Jun 12 Oct 12

Performance relative to S&P 500

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32

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3839



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.


7/28



Market Perspective: USEquity Sectors (continued)Bias Near-Term Intermediate-Term Long-TermDJ Oil & Gas Neutral Neutral 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.

Energy Leaders: CNX, NOV, HAL, EOG, BTU, SLB

Energy Laggards:WLT, APA, RDS.A, APC, CNQ, CVX

Bias Near-Term Intermediate-Term Long-TermDJ Financials Bullish Potential to Outperform 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

Bias Near-Term Intermediate-Term Long-TermDJ Health Care Bullish Outperform 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.

Healthcare Leaders: LLY, AGP, AMGN, NVS, BAX, JNJ*

Healthcare Laggards: DGX*, LH*, GSK, ABT, COV, HCA

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Market Perspective: US Equity Sectors (continued)Bias Near-Term Intermediate-Term Long-TermDJ Industrials Neutral Neutral Market weight 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

Bias Near-Term Intermediate-Term Long-TermDJ Technology Bearish Neutral Market Weight 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

Bias Near-Term Intermediate-Term Long-TermDJ Utilities Neutral Neutral Underweight 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

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Market Perspective: Equity Volatility

Figure 5. Equity Volatility: Realized vs. Implied Figure 6. Equity Volatility: Realized vs. Implied

ETF Volatility Dashboard Close WVScore WV-Vol WV-Tact Change 20DPrem 60DPrem AvgVol (K) CallOI (K) PutOI (K)Broad Equity IndicesSPY S&P Dep Receipts 143.39 2.00 2.00 2.00 0.00 3.64 2.38 1,000 7,593 15,608IWM iShares Russell 2000 Index Tr 81.85 2.25 2.50 2.00 0.00 6.41 4.17 393 1,946 4,705QQQ PowerShares QQQ Trust Series 1 65.68 2.00 2.00 2.00 0.00 3.97 2.66 349 1,976 2,705EFA iShares MSCI EAFE Index Tr 54.14 2.25 2.50 2.00 0.25 5.21 0.59 61 914 1,328US Equity SectorsXLE S&P Sel Energy Spdr Fund 73.83 2.50 2.00 3.00 0.00 2.94 0.84 63 450 829XLF S&P Sel Financial Spdr Fund 16.11 1.50 2.00 1.00 0.00 4.47 3.43 234 2,863 2,787

XLK S&P Sel Technology Spdr Fund 29.29 2.00 2.00 2.00 (0.25) 4.67 2.64 53 319 365XLB S&P Sel Materials Spdr Fund 37.09 2.50 2.00 3.00 0.00 1.93 2.05 38 212 400XLI S&P Sel Industrial Spdr Fund 36.79 2.50 2.00 3.00 0.00 4.29 1.86 51 381 661XLY S&P Sel Consum Discretion'y Sp 46.58 2.00 2.00 2.00 0.00 3.83 2.62 7 106 280XLP S&P Sel Consum Staples Spdr Fu 35.71 1.75 1.50 2.00 0.00 2.64 2.00 16 203 331XLU S&P Sel Utilities Spdr Fund 37.11 2.25 1.50 3.00 0.00 1.53 1.82 19 204 179XLV S&P Sel Health Care Spdr Fund 40.6 2.50 1.50 3.50 (0.25) 4.45 2.78 16 154 287CommoditiesGLD SPDR Gold Trust 166.97 1.75 1.50 2.00 (0.50) 3.07 1.95 276 3,389 1,499USO United States Oil Fund LP 33.34 2.75 2.50 3.00 0.00 1.24 1.13 104 988 767

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.

5

10

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25


S&P 500 20DRV VIX

source: Waverly Advisors, CBOE

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28


S&P 500 60DRV VXV (3M)

source: Waverly Advisors, CBOE


10/28



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 levelsreached 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 wherethe cost of mid-term protection still appears attractive relative to recent

history.

For call over writers, our WV scoring methodology shows the Industrial

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.

CBOE SKEW index - measures the difference in implied volatilities for out-of-the-money S&P 500

optionshigher readings signal a greater demand for protection.

S&P 500 put/call ratio - a high put/call ratio tells us that more puts are being traded relative to

calls.

Figure 7. Shifting Correlations

Figure 8. Buy Writes Still Performing Strong.....

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CBOE S&P 500 Implied Correlation Index (January 2013)

CBOE S&P 500 Implied Correlation Index (January 2014)

source: CBOE

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CBOE S&P500 2% OTM BuyWrite Index

source: CBOE


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Market Perspective: Rates & CurrenciesBias Near-Term Intermediate-Term30Y Treasury Fut. Short Neutral

US Dollar Index Bearish Bearish

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 thisposition with us can work a tight stop on what is left, as a rally against the

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

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.

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

Figure 10. Euro/US Dollar, Daily

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weekly with 20XMA +/- Keltner Channels

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Market Perspective: MetalsBias Near-Term Intermediate-Term Long-TermGold Bullish (Long Silver) Neutral Market weight

Copper Long Neutral Market Weight

Bullish patterns and setups, but short-term complications. Long position in Copper is near our raised stop level.

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

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,

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. Wewould 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?

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

Figure 12. Copper (COMEX front month, continuous), Daily

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Market Perspective: Energy CommoditiesBias Near-Term Intermediate-Term Long-TermCrude Oil Short Neutral Market weight

Natural Gas Long Possible Inflection Market weight

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 and110.00. 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 timingremains 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 13. LS Crude Oil (NYMEX front month, continuous), Daily

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

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Market Perspective: Food CommoditiesBias Near-Term Intermediate-Term Long-TermSugar Neutral Neutral Underweight

Grains Neutral Neutral Market weight

Tactical patterns in Grains now tilted to the downside. Possible long setup in Wheat on the weekly charts.

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 tradingopportunities in the Grain Complex at this time. If we had to pick a trade, it

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

have no mandated exposure, we will simply wait on the sidelines for better

opportunities to present themselves in Grains.

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

Figure 16. . Sugar No. 11 (ICE front month, continuous), Weekly

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2009 2010 2011 2012

Weekly with 20XMA +/- Keltner Channels


15/28



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 thepopulation 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.

A


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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 the18th 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 toprop 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 canlead 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 amodest consumption tax increase, constant cabinet reshufflings continue and the perpetual rolling of the nation's astronomical debt in the bondmarket 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 theglobal 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.


17/28




European Sovereign Bonds -This market remains an undecided voter as contracting rates for Spanish and Italian bonds on the short end of thecurb (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 veryyoung 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'sgrowth targets.

The Yuan -Another undecided as appreciation against the USD in recent months on QE fears have been matched by net outflows until Septemberaccording 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 shouldnot 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 byallowing 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.


18/28




Our macro investment view has evolved into four key themes overthe past 18 months:

The US economy remains poised to outperform. USD relative strength is now being challenged by a potentially very significantexpansion 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 profoundimpact 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 activelymanaged.

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.


19/28



Macro Perspective: US

Although employment signals have improved at a moderate pace in

recent months, the underlying situation is less positive than the

headline unemployment rate would suggest and recovery remains

fragile. Additionally, uncertainty about the health of the global

economy in general continues to cast a shadow over prospects fordomestic 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

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

sentiment that has the potential to deteriorate rapidly (see Wild

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.

Figure 17. For Real?

Figure 18. Industrial Activity

3

4

5

6

7

8

9

10

11

12

002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Existing Homes, Months of Supply (single family & condo)

Existing Home Sales (single family & condo, millions)

source: National Association of Realtors

-45

-30

-15

0

15

30

0

10

20

30

40

50

60

2007 2008 2009 2010 2011 2012

US: ISM Mfg. Comp. Dallas Fed Mfg. (production)

Richmond Fed Mfg.

source: Institute for Supply Management, Federal Reserve Bank of Dallas


20/28



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 consensusforecasts 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

Figure 20. Sentiment at the Cash Register....

10Y

2Y

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

19-Oct-12 25-Jul-12 27-Oct-11

45

50

55

60

65

70

75

80

85

2007 2008 2009 2010 2011 2012

University of Michigan Consumer Sentiment

University of Michigan Consumer Sentiment -Expectations

source: University of Michigan


21/28



Macro Perspective: Europe

We anticipate the higher volatility regime in European financial markets

will continue for the near-term and we maintain our negative intermediate-

term 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 theimpact 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.

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 pledgeto an "objective of agreeing on the legislative framework" by the New Year.

More important from a market narrative standpoint, no progress was

acknowledged for the management of the ongoing peripheral/Spain/Italian debt

crisis. A bright spot for the week was German ZEW sentiment readings which

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: Wereiterate 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.

Figure 21.Yield vs. CDS

Figure 22.The Euro

1

2

3

4

5

6

7

8

9

88

90

92

94

96

98

100

2007 2008 2009 2010 2011 2012

IBOXX ITALY 1-3 YRS CDS Italy 3Y Yield

source: Thomson Reuters

1.15

1.17

1.19

1.21

1.23

1.25

1.27

1.29

0.7

0.7

0.7

0.8

0.8

0.8

0.8

ct 11 Jan 12 Apr 12 Jul 12 Oct 12

EUR vs. USD EUR vs. GBP



22/28



Macro Perspective:Asia

China: Prior to last week China was the last place left where "bad-news-is-

good" as evidenced by bullish quantitative set-ups for equities on

expectations of fresh rounds of targeted stimulus in the near-term. Bullish

September activity measures (potentially heavily skewed by the mid-

Autumn 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,are clear near-term bullish signals for Chinese equities and other financial assets.

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

any additional curbing action. Finally, note that PBOC September currency flows

data released on Friday showed that the flight of capital reversed for the month

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, andany impact from disaster-recovery public investment has been fully offsetby contracting external demand. Note that tensions with China threaten tofurther undermine PROC bound export levels. Like an exaggerated

version of Europe and the US, it is a lack of political will that preventsnecessary reforms to increase demand. Last night's trade data release wasabysmal with exports contracting by 10.3% Y/Y (-14% Y/Y for China). In hisaddress BOJ Governor Shirakawa vowed to continue easing and intervene incurrency markets if necessary. Note that National and Tokyo specific CPI levelsfor August and September respectively will be announced on Friday withexpectations for continued Y/Y mid single-digit contraction.

Figure 23. Looking for Confirmation of a Rebound

Figure 24. Grim

38

42

46

50

54

58

62

2008 2009 2010 2011 2012

China: HSBC Manufacturing PMI -New OrdersChina: HSBC Manufacturing PMI -EmploymentChina: HSBC Manufacturing PMI -Output


-60

-40

-20

0

20

40

60

80

007 2008 2009 2010 2011 2012

Japan: Exports (% Change Y/Y)Japan: Exports to China (% Change Y/Y)Japan: Exports to Western Europe (% Change Y/Y)

source: Bloomberg


23/28



Macro Perspective: Commodities

While we continue to manage commodity exposures tactically, we do have

a number of longer-term perspectives on various segments of the

commodity markets that inform our process. Our intermediate and long-

term analysis leads us to a few conclusions:

Despite recent weakness on slow global growth prospects, our long-termview 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 anywherenear the pace of two years ago, while wage inflation in China may set the

stage for increased domestic industrial activity. Long-term prospects forgas are therefore shifting to a more bullish bias for us.

September import measures for base metals in China surged with Ironore, Copper and Copper scrap up by 4%, 11% and 5% M/M

respectively. Anecdotal evidences suggests that arbitrage rather than end-

user restock as a primary driver for copper imports and, furthermore,

believe that this rebound is unlikely to sustain at these levels (unlike Iron

ore which appears to be directly linked to probably unnecessary,

production increases at steel mills).

While this season's drought conditions in the US sparked a huge swing ingrain 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 set-

ups to occur with greater frequency over the long-term.

Figure 25. Pressure at the Pump: Starting to Subside?

Figure 26.WTI/Brent Spread Remains Wide

-10

15

40

65

90

115

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

-30

-25

-20

-15

-10

-5

0

5

007 2008 2009 2010 2011 2012

Crude Spread WTI- Brent Crude Spread WTI- Brent (3MMA)



24/28



Macro Perspective (continued)

WILD CARDS:Outlier event-risk factors we are actively tracking

US FISCAL CLIFF

History tells us that it is important not to discount the raw power of willful idiocy driven by partisan politicalconsiderations. The presidential election stands as a potentially polarizing event which leads the losing sideto entrench themselves in petty one-upmanship, making agreement impossible and causing taxes to increasein 2013 with the ensuing potential drag on GDP estimated as high as 3.5% by some. While a last-minuteextension is the most likely outcome, the possibility of a disaster must remain on all investors' radars.

EUROPEAN FINANCIALSECTOR

The ECB bond-buying facility announcement has taken pressure off the peripheral economies publicsovereign yields and provided breathing room for financials with remaining exposure. Uncertainty remainsover the banking sectors of economically weaker Union states, however, as underscored by Moody's reportlast month that indicated Spanish banks will ultimately require nearly twice the capital injection claimed byMadrid. It is also of note that the new ECB short-term bond facility allows for a pass-through to thebanking sector via governments that, while creating a solution, also potentially complicates matters severelyin a systemic event later. European banks have raised capital and shed assets, but they are far from out ofthe woods just yet.

RAPID INFLATION

In a zero rate world, the sudden appearance of inflationary pressure remains an apparition in the minds ofevery policy maker. The most recent ZEW inflation expectations in Germany and record low yields at lastweek's USD 7 billion TIPS auction in the US indicates the amount of anxiety permeating westerneconomies.

CHINA ASSET/DEBT SHOCK

Recent signs of modest resilience in property markets fanned fears that current round of easing actions havestarted to cause a trickle down into the opaque universe of regional and informal lenders that were integralto the initial real estate bubble. Note that there has been a pickup in recent months of anecdotal reports ofcomplete illiquidity in some smaller regional property markets. In this set-up, concerns of a collapse inChinese real estate valuations or a sudden emergence of massive hidden non-performing loans continues tobubble under the surface of all discussions of the Chinese economy. While official figures show non-performing levels at primary commercial banks are still insignificant, anecdotal discussion of defaults byproperty developers and regional-level capacity or infrastructure projects persist. When the governmentaltransition is complete next month, it is possible that Beijing will acknowledge more issues. For nowhowever, the "extend & pretend" approach to troubled loans appears to be the preferred strategy.


25/28



Data Table: Equities - Relative Strength Rankings and One Week Changes in RankingsUS Market Cap Indexes Now Chg Rat Sectors Now Chg Rat Market Now Chg Rat

S&P 100 Index 1 0 1.6 Wireless Comm 1 0 0.8 Greece 1 0 0.6S&P 500 Index 2 0 1.6 Media 2 0 1.2 Denmark 2 2 0.7Dow Jones Wilshire 5000 Comp 3 1 1.6 Construction and Matrls 3 3 1.2 Spain 3 28 1.2S&P SmallCap 600 Index 4 2 1.4 Forest Products 4 -1 1.2 Mexico 4 1 1.0Russell 2000 Index 5 0 1.4 Pharmaceuticals & Bio 5 0 1.9 Italy 5 20 1.0

iShs Russell MicroCap Index 6 -3 1.4 Nonlife Insurance 6 1 1.8 Philippines 6 -4 0.8Banks 7 1 1.0 Germany 7 4 0.9

Industry Now Chg Rat General Financial 8 1 1.3 Belgium 8 -5 1.1Financials TR 1 3 1.2 General Industrials 9 -5 1.6 Switzerland 8 -2 1.1Health Care TR 2 -1 1.8 Insurance, Life 10 8 1.6 France 10 14 0.9

Telecommunications TR 3 -1 1.6 Household Goods 11 2 1.3 Netherlands 11 2 0.9Consumer Services TR 4 -1 1.5 Leisure Goods 12 5 1.3 Europe 12 5 1.0Oil & Gas TR 5 0 1.2 General Retailers 13 -3 1.2 Norway 13 -5 0.8Utilities TR 6 2 1.3 Oil & Gas Producers 14 0 1.3 Dubai 14 -5 1.0Industrials TR 7 -1 1.4 Oil Equip Servic & Distr 15 7 1.1 Hong Kong 15 -8 0.3Basic Materials TR 8 1 1.5 Fixed Line Commun 16 -4 1.6 Australia 16 -2 1.0Consumer Goods TR 9 -2 1.3 Electric Utility 17 9 1.2 UK 17 1 0.8

Technology TR 10 0 1.8 Industrial Metals 18 16 1.1 Singapore 18 -8 0.8

Real Estate 19 8 1.3 US (SP500) 19 -7 1.6SuperSectors Now Chg Rat Gas Water Multiutilities 20 5 1.3 Portugal 20 12 1.2Media 1 0 1.2 Support Services 21 -5 1.2 Finland 21 9 0.9Construction and Matrls 2 0 1.2 Food Producers 22 -1 1.4 Malaysia 22 -7 0.8Insurance 3 1 1.8 Food & Drug Retailers 23 -4 1.5 Canada 23 -2 1.0Banks 4 1 1.0 Health Care Equip & Serv 24 -13 1.2 Ireland 24 -2 1.0Financial Service 5 2 1.3 Mining 25 -1 0.9 South Korea 25 -6 0.7Healthcare 6 -3 1.8 Aerospace 26 2 1.4 Israel 26 7 0.6

Telecommunication 7 -1 1.6 Personal Goods 27 3 1.5 Mid East / Africa 27 -8 1.2Retail 8 0 1.2 Chemicals 28 3 1.7 Russia 28 6 0.7Oil & Gas 9 0 1.2 Industrial Engineering 29 4 1.2 Indonesia 29 -6 0.7Real Estate TR 10 1 1.3 Beverage 30 -7 1.0 Latin America 30 -2 0.8Basic Resources 11 4 1.1 Industrial Trans 31 1 1.0 Chile 31 -5 1.3Utilities 12 2 1.3 Electronic & Electrical 32 -3 1.5 India 32 -16 0.8Real Estate 13 3 1.3 Tobacco 33 -13 1.4 Taiwan 33 -6 0.7Industrial Goods 14 -4 1.4 Automobiles & Parts 34 2 1.1 South Africa 34 -5 1.3Non-cyclical Good 15 -2 1.4 Software & Computer Serv 35 -20 1.6 Japan 35 2 0.5Food & Beverage 16 -4 1.2 Cyclical Goods 36 -1 1.7 Brazil 36 -1 0.6Chemicals 17 0 1.7 Tech Hardware & Equip 37 0 1.8 Shanghai 37 -1 0.6

Automobiles & Parts 18 1 1.1 China Broad Mkt 38 0 0.7Technology 19 -1 1.8 Shenzhen 39 0 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, thistool overcomes many of the limitations oftraditional 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 thirdshows the ratio of the 1 week and 1 quarter realized volatilities.


26/28



Data Table:Tactical Dashboard for Our Primary Markets

Name Last %Chg StDevCl OB/OS 52wkRet Vol20 Vol90 VolRatio Ctrend Ltrend StrendUS Market Cap - Based IndexesS&P SmallCap 600 Index 458.80 (1.7%) -2.3 18 13.5% 12.9% 15.7% 0.8 Conf Up Up UpiShs Russell MicroCap Index 51.04 (2.1%) -2.7 -5 21.1% 13.9% 17.1% 0.8 Conf Up Up Up

Dow Jones Wilshire 5000 Comp 14,910.98 (1.6%) -2.7 30 17.8% 11.5% 13.2% 0.9 Conf Up Up UpS&P 500 Index 1,433.19 (1.7%) -2.8 30 17.9% 11.4% 13.0% 0.9 Conf Up Up UpiShares Russell 2000 Index Tr 81.85 (2.0%) -2.8 21 17.6% 13.5% 15.9% 0.9 Conf Up Up UpS&P 100 Index 657.11 (1.7%) -2.9 24 19.5% 11.3% 12.6% 0.9 Conf Up Up UpDow Jones Industrial Average 13,343.51 (1.5%) -3.0 29 15.6% 9.9% 11.9% 0.8 Conf Up Up UpDow Jones US Industry Indexes (Total Return)Utilities 455.70 (0.7%) -1.4 81 13.2% 8.6% 9.5% 0.9 Conf Up* Up* UpFinancials 495.23 (1.2%) -1.6 66 28.7% 13.0% 14.9% 0.9 Conf Up Up UpOil & Gas 1,018.02 (1.5%) -1.7 54 12.0% 15.6% 19.6% 0.8 Conf Up Up UpBasic Materials 445.16 (2.1%) -2.0 56 13.6% 18.5% 20.4% 0.9 Conf Up Up Up

Telecommunications 316.77 (1.7%) -2.4 22 27.8% 13.0% 13.4% 1.0 Trans Up Up DownConsumer Goods 592.60 (1.3%) -2.4 39 15.7% 10.0% 11.0% 0.9 Conf Up Up UpConsumer Services 548.55 (1.6%) -2.5 40 26.9% 11.8% 12.4% 1.0 Conf Up Up UpIndustrials 492.07 (1.7%) -2.5 46 20.5% 12.6% 15.6% 0.8 Conf Up Up Up

Technology 832.55 (2.4%) -2.6 -22 12.6% 16.8% 17.8% 0.9 Trans Down* Down* UpHealth Care 602.13 (1.7%) -2.8 44 29.9% 11.9% 12.0% 1.0 Conf Up Up UpInterest Rate Futures30 Yr U.S.T Bonds CC [Dec12] 147.5625 0.8% 1.5 39 7.5% 9.1% 9.3% 1.0 Conf Down Down Down10 Yr U.S. T Notes CC [Dec12] 132'12.5 0.3% 1.3 29 5.4% 3.9% 4.2% 0.9 Conf Down Down DownCurrenciesUS Dollar / Canadian Dollar 0.99 0.7% 1.8 86 (2.7%) 7.1% 6.9% 1.0 Conf Down ??* DownUS Dollar / Japanese Yen 79.30 0.0% 0.2 87 1.2% 3.9% 6.0% 0.6 Conf Up Up UpEuro / Japanese Yen 103.31 (0.3%) -0.5 83 (3.8%) 8.8% 10.9% 0.8 Conf Up Up UpBritish Pound / US Dollar 1.60 (0.2%) -0.6 31 0.4% 5.7% 6.5% 0.9 Conf Up Up Up

Aust Dollar / US Dollar 1.03 (0.3%) -0.7 56 0.0% 7.5% 9.2% 0.8 Trans Down Down UpEuro / US Dollar 1.30 (0.3%) -0.7 65 (4.9%) 7.0% 9.1% 0.8 Conf Up Up UpCOMEX Metals (Futures)Gold CC [Dec12] 1724.00 (1.2%) -1.7 17 5.7% 11.6% 15.2% 0.8 Trans Up Up DownSilver CC [Dec12] 32.10 (2.3%) -2.0 9 4.8% 20.6% 27.3% 0.8 Trans Up Up DownCopper CC [Dec12] 3.64 (2.8%) -3.3 23 17.4% 16.8% 21.7% 0.8 Conf Up Up UpNYMEX Energy (Futures)Natural Gas CC [Nov12] 3.617 0.8% 0.4 85 (22.4%) 36.7% 48.2% 0.8 Trans Up Up DownCrude Oil CC [Dec12] 90.44 (2.3%) -1.3 31 0.3% 29.8% 31.6% 0.9 Trans Down Down Up

continued next page


27/28



Data Table:Tactical Dashboard for Our Primary Markets (continued)

Name Last %Chg StDevCl OB/OS 52wkRet Vol20 Vol90 VolRatio Ctrend Ltrend Strend

NYBOT Softs (Futures)Sugar No. 11 CC [Mar13] 20.23 2.2% 1.3 38 (20.9%) 27.9% 28.7% 1.0 Conf Down Down DownCocoa CC [Dec12] 2489.00 2.1% 1.3 69 (4.9%) 27.3% 28.2% 1.0 Trans Down Down Up

Coffee C CC [Dec12] 161.65 1.9% 0.9 29 (33.8%) 32.8% 35.1% 0.9 Conf Down Down DownCotton No. 2 CC [Dec12] 76.88 (1.1%) -0.7 89 (10.2%) 24.3% 30.5% 0.8 Conf Up Up UpCBOT Grain (Futures)

Wheat CC [Dec12] 872.50 0.5% 0.2 53 23.5% 29.5% 35.1% 0.8 Trans Down* Down Up*Corn CC [Dec12] 761.50 0.1% 0.0 60 24.1% 33.3% 35.5% 0.9 Trans Down Down UpSoybeans CC [Nov12] 1534.25 (0.7%) -0.5 36 34.6% 23.6% 28.8% 0.8 Trans Down Down Up

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 continuous contractLast most recent price%Chg percent change from previous days closeStDevCl the close expressed as a standard deviation of the past 20 trading days.OB / OS our proprietary overbought /oversold indicator. 50 is a neutral reading.52wkRet 1 year simple percentage returnVol20 Annualized realized volatility calculated from the past 20 trading daysVol90 Annualized realized volatility calculated from the past 90 trading dayVolRatio 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.Ctrend composite trend indicatorLtrend trend of the longer-term momentum (2-3M)Strend trend of the short-term momentum (1W -1M)* status changed at yesterday's close


28/28


Copyright Waverly Advisors LLC 2012 Please review Disclosures on the final page of this report

Waverly Advisors, LLC

228 Cedar StreetCorning, NY 14830

(607) 684-5300

Exclusively distributed in Canada by:

Forefactor Inc.

1 Yonge Street, Suite 1801Toronto, ON, Canada

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Disclosures:

Tactical Playbook ("The Report") is a newsletter published by Waverly Advisors, LLC ("Waverly Advisors"). Receipt of The Report is subject to terms ofservice: 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 orcompleteness. Opinions expressed in The Report are subject to change without notice. The Report, and tacticalplaybook.com ("The Website") and allinformation provided therein should not be construed as a request to engage in any transaction involving the purchase or sale of securities, futurescontracts, commodities, currencies and/or options thereon. The risk of loss in trading securities, futures contracts, commodities, currencies and/oroptions thereon is substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition anddiscuss 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 undercopyright 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 distributedto 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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