Good morning traders,

• From my morning note for Waverly Advisors on US Equities:

• We have been surprised at the strength in equities over the past week; the word “resilience” shows up in our writing and our thinking time and again.  Yesterday’s consolidation above significant resistance is consistent with a market that wants to go higher.  This brings us to an interesting risk management challenge.  On one hand, everything we have written in the past weeks is still true.  This market is overextended, potentially overdue for a pullback, and we do not see strong buying conviction on the tape.  Couple this with a sense of complacency, and we have a recipe for a market that could melt into an oversized pullback at the slightest provocation.  However, we cannot deny reality and the reality is that every dip is bought and any selloff finds demand.  In plain English, this market acts like a market that really wants to go up.

  Clients following our recommendations should be holding significant broad equity exposure from late September 2010, but should have been stopped out of some exposure on the January selloff.  An effective plan has to consider three factors at this point:  holding some exposure in case the market simply heads higher, protecting the downside in the event of a selloff, and planning to buy into that selloff, adding long exposure at lower levels.  This is a tall order, but the only clear mistake we could see would be to initiate significant exposure at this point in the market structure.

  As of yesterday’s close, we are no longer considering the possibility of a short trade in broad indexes.  Though there is truth in the old saying that shorting finally works at precisely the point it becomes embarrassing, we are only interested in being involved in trades in which we see the potential for trapped buyers to hit the bids en masse.  What we see here is more indicative of a strong market in consolidation and we do not see potential for a high probability trade to the downside.  The market may well go down, but it will do so without us.

• A very mixed bag in world equities this morning.  Asia ex Japan is up slightly (Japan -0.4%).  Europe is off fairly strongly, and pressing on the lows of the session as I write this with Spain leading the charge lower.  The story you probably will not read anywhere else is how does the Australian market respond to the multiple stresses on it this week?  By trading to new 52 week highs overnight.  Always important to know this.  (For reference, Russia broad indexes (such as they are.  This market is more a collection of a few important stocks than an actual, developed stock market) and the Dow Jones Industrial Average traded to new 52 week highs as well.
• In currencies, the main theme is AUD strength (see AUDCHF, AUDJPY, etc).  A little Euro weakness, but the net impact on the US Dollar index is slightly positive.
• Precious metals are a little weak.  Crude and Products are strong across the board, with more early strength in the crack.  (Technical note:  I mentioned the Brent/WTI spread in yesterday’s note.  If you do not track this but just punched it up on your platform be aware that there may be a synchronicity issue.  Some platforms will show the historical spread using London’s close vs New York close, which occurred at two different times and represents a price that could not have been executed.  If you have no interest in this spread or no idea what I’m talking about, ignore this comment, but if you are interested in the spread, consider this carefully.)
• Cotton and Coffee are ripping again this morning, while Sugar is down slightly.  (A long position in Coffee futures is one of my themes for 1H 2011 in the Waverly portfolio.)  Early CBOT sessions in grains are mixed.
• In practical terms, the stock market is consolidation above resistance, which means many tight-range, low volume days.  If you are trading a truly in play stock (fresh earnings are always a good and obvious candidate) you may be able to negate this issue, but do not focus attention on index products until this pattern breaks.  We continue to see good strength in Energy and Industrials (see DJIA/SPY spread for instance), so there could well be more productive sector plays there if we rally.  If the market is weak, be aware that there has been serious weakness in Consumer stocks, but, at this point,  there are also a lot of oversold names in that sector.  Financials probably should continue to be your go-to if we are weak, but do not anticipate this scenario.  The Bulls are in control of this market and deserve our respect until the pattern changes.