Good morning traders,

From my weekend note for Waverly Advisors:

We see many conflicting tactical factors in Equities, which is typical of price action in consolidation areas.  On one hand, our sector themes remain largely intact as the sectors recently underperforming are actually the traditionally defensive Staples.  Another indication of a potentially supportive psychological backdrop is the continued outperformance of Consumer Discretionary stocks over those Staples.  However, we are seeing no real buying pressure up here, which should be a dramatic caution sign to heavy longs.  To see a market consolidating near highs is usually constructive, but this particular type of consolidation, in an already overextended market, sets up a potentially dramatic break as stops are hit and longs scramble to run for the exits all at once.

Existing longs should protect partial positions with tight stops, while giving the remainder a little more room.  It is also possible to justify aggressive shorts, though we would recommend covering part of those into any weakness, and being prepared to stop out of the entire position on a strong close at new highs.  If we are sending a mixed message here, it is in response to the current tactical situation which is itself a mixed message.  In the longer-term, we maintain our bullish bias on equities while we are increasingly aware of the probability of near-term weakness.

I believe that most of Waverly’s clients have a considerably longer duration (6-12 months) than most of this blog’s readers; most of our readers will best be served by focusing on the potential coming downswing rather than worrying about the longer-term bullish bias.  Be aware that the broad market is set up for a possible breakdown.

Coming in this morning, we are seeing a weak to very weak tone in world equities.  Asia is off 1.5% on average (India 2.5%), Europe 2% across the board, and some of the leaders in the South Pacific (Indonesia, Philippines) are down over 5%.  S&P futures are currently (8:45 EST( down) only 0.4% (1.2 standard deviations). Still watching basically the same levels on the ES futures (1056 and 1066).

No major moves in currencies overnight.

Also a quiet beginning to the week for commodities, with Energies up slightly (no Brent/WTI divergence), Precious Metals up slightly, and grains up a bit more significantly.

No economic numbers out today, but for stock traders, we are edging closer to the beginning of earnings season, which should bring some more tradable moves into the market.

Looking at some Basic Materials stocks to come off if the market is weak today (X, AKS, etc).  Also keep an eye on education names on the STRA news and LDK should be in play today.