Relative Performances of Key Markets, Indexes and S&P 500 Sectors

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1 22 May 2014 Relative Performances of Key Markets, Indexes and S&P 500 Sectors Peter Lee Chief Technical Strategist CIO Wealth Management Research This report has been prepared by UBS Financial Services Inc. ( UBS FS ). All charts and data are sourced from Thomson Reuters and UBS CIO WMR as of 21 May 2014

2 Stock Market Psychology Fear, Greed, and Hope Greed/Euphoria 1 st Half 2007 Greed/Euphoria 2014 Thrill Anxiety Are we here? Thrill 1 st Half 2015 Excitement Denial Excitement Optimism Fear 1st Half 2008 Optimism 1 st Qtr nd Half 2015 Desperation Relief Capitulation Despondency 4 th Qtr 2008 Panic Hope Depression 1 st Qtr /early

3 4 Stages of a Bull Rally Price Stage I 2009 to 2010 Smart Money Insiders, Contrarians, and Deep Value Investors Stage II 2011 to 2013 Institutional Money Professional Traders, Money Managers, Hedge Funds, and etc. Media/Press Attention First deep correction Stage III 2013 to 2014 Stage IV 2015 to 2016? "New Paradigm" Denial Delusion Return to "Normal" Greed Bull Trap Fear Public Money - Retail Investors Optimism Are we here? Capitulation Return to the Mean Despair Bear Trap Historical Mean Acceleration Accumulation (Stealth) Phase Awareness Phase Mania/Speculative /Melt-up Phase Blow-off Phase Time 2

4 US Economic/Business Cycle, Sector Rotation & Duration Early Expansion Middle Expansion Services Technology Transportation Late Expansion Energy Basic Materials Capital Goods Industrials Early Contraction Consumer Staples Healthcare Utilities Financials Late Contraction Consumer Cyclicals March ? Early Expansion 12 to 18 months Inflation = Continues to fall Interest Rates = Bottoming out Middle Expansion 12 to 18 months Inflation = Bottoming out Interest Rates = Rising modestly Late Expansion 12 to 18 months Inflation = Rising Interest Rates = Rising rapidly Early Contraction 6 to 9 months Inflation = Rising less strongly Interest Rates = Peaking Deep Contraction 6 to 9 months Inflation = Flat to Declining Interest Rates = Falling 1 complete cycle 48 to 72 months or 4 to 6 years 3

5 Global Markets/QE Programs/9-inning Baseball Game Analogy End of the Game Bottom of the 9 th Inning (???) 7 th to 8 th Inning? US Equities - SPX Index TARP - Troubled Asset Relief Program (10/08), QE1 (11/08), QE2 (11/10), Operation Twist (9/11), QE3 (9/12 and 1/13), QE3 Tapering announced (12/13) 4 th to 5 th Inning European Equities MSCI EMU Index ECB LTRO program Long Term Refinancing Operation 2-stage program stage 1 (12/21/11) and stage 2 (2/28/12) 2 nd to 3 rd Inning Japanese Equities - Nikkei 225 Index Bank of Japan's Kuroda and Prime Minister Abe Asset Purchase program 4/13 1 st Inning Emerging Markets Equities - (MSCI Emerging Markets Index) Start of the Game (recovery) (3/09) 4

6 Global Equities Relative Performance since 3/6/09 SPX MSCI Emerging Markets Nikkei EMU From the Mar 2009 bottom, the high beta MSCI Emerging Markets dramatically outperformed almost all global equities. This dramatic outperformance cycle suddenly ended in 2011 as a deep correction in global markets led to the emergence of US equities (SPX) as a leadership market. This trend has accelerated over the past year as SPX is now outperforming its closest competitor (MSCI Emerging Markets) by nearly 65 points. The last time we witnessed such a large discrepancy was during the summer of 2011 when MSCI Emerging Markets outperformed SPX by nearly 47 points. 5

7 Global Equities Relative Performance from 10/4/11 From the October 2011 bottom or just before ECB launched its LTRO stage 1 bailout of European Financials, all four key global equity markets basically traded in line with each other. At the end of 1Q12 (LTRO stage 2), US Equities (SPX) and in particular European Equities (EMU) began to emerge as leadership markets. Although SPX continues to outperform its global peers, EMU appears to be closing the performance gap. Nikkei 225 is the only major equity market to decline in relative strength reading in the past few months. SPX EMU Nikkei MSCI Emerging Markets 6

8 Global Equities Relative Performance from 6/24/13 EMU SPX MSCI Emerging Markets Nikkei From the June 2013 bottom, there has been a change in leadership as EMU has quietly moved to the top. However, we are intrigued by the high beta MSCI Emerging Markets as it has recorded the largest jump in relative strength from its February low of 104 to a recent high of 117. At this pace, it will soon overtake SPX and begin to challenge EMU. Japanese Equities, as represented by Nikkei 225, are now the deep value call. 7

9 S&P 500 Sectors Relative Performance from 3/6/09 (666.79) Since the March 2009 bottom or the beginning of Stage I of the bull rally or the accumulation (stealth) phase smart money, contrarian investors, and deep value investors began to buy into new leadership sectors (i.e., Consumer Discretionary, Industrials and Technology) as well as battered sectors (i.e., Financials) from the bear decline. They avoided the former market leaders (i.e., Energy and Materials) from the prior cyclical bull rally as well as the defensive, income related sectors (i.e., Utilities, Telecom Services and Consumer Staples). As the cyclical bull enters into its fifth year, we notice some of the leaders ( Consumer Discretionary and Financials) are losing relative strength and the laggards and defensive sectors (Consumer Staples, Energy, Materials) are gaining relative strengths Consumer Discretionary Financials Industrials Info Technology SPX Materials Healthcare Consumer Staples Energy Utilities Telecom Services 8

10 S&P 500 Sectors Relative Performance from 10/4/11 (1,074.77) Since the October 2011 bottom or the Stage 2 (awareness phase) of the bull rally, institutional investors are the key player as they begin to buy into the economically sensitive sectors (Consumer Discretionary and Industrials). They also began to accumulate Financials after the ECB LTRO program into late 2011/early In addition, these professional investors also pursued Healthcare to leverage the growth call. They basically avoided most of the defensive sectors such as Telecom Services, Utilities and Consumer Staples. Financials Consumer Discretionary Healthcare Industrials SPX Materials Info Technology Energy Consumer Staples Telecom Services Utilities 9

11 S&P 500 Sectors Relative Performance from 6/24/13 (1,560.33) Stage III of the bull rally is often referred to as the Mania/Speculative/Melt-up stage as retail investors are active participants. The strong flow of funds into equities by investment public in 2013 hints at the mature phase of the bull cycle. Late cyclical sectors such as Capital Goods, Manufacturing, Industrials, Materials and Energy tend to outperform. From the June 2013 bottom to now, it is interesting to note that Industrials, Materials and Energy have all been outperforming SPX. Industrials Materials Info Technology Healthcare Energy SPX Consumer Discretionary Financials Utilities Consumer Staples Telecom Services 10

12 S&P 500 Value (IVX) vs S&P 500 Growth (IGX) from June 2013 S&P Value appears to be assuming a market leadership role as evidenced by a series of higher highs. Although S&P Growth successfully tested key support during the March- April correction, lower highs suggest a loss of leadership in the near term. S&P Value confirmed a relative strength breakout against S&P Growth during March However, an overbought condition may lead to a normal consolidation, and the resumption of the uptrend. 11

13 Large Caps (RUI) vs Small Caps (RUT) from June 2013 Russell 1000 continues to be stronger than Russell 2000, indicating a risk aversion/risk-off scenario, at least on a near-term basis. Breakout above 1,061 reaffirms RUI leadership role. A rare Fan pattern as well as a Head & Shoulders top have developed in Russell An oversold condition can lead to a technical rally possibly to 1,137-1,157. However, failure to break out, coupled with a violation of 1,082 and the rolling of the 200-day moving average, confirms a medium-term top. A 1-year technical base breakout in April suggests investors continue to favor large caps over small Caps. A recent overbought condition may lead to a near-term technical bounce in small caps, but this may be temporary as money returns to larger-cap names. 12

14 Listed Market (NYA) vs OTC Market (COMP) from June 2013 The listed market as represented by NYSE Composite has outperformed its OTC counterpart over the past three months. New higher highs hint of investors favoring defensive, value, and dividend yielding names. NASDAQ Composite is a proxy to many of the growth and higher beta names. The violation of the June 2013 uptrend and lower highs suggest a change in its leadership role. Despite this breakdown, COMP is still trading above its 200-day ma (4,009) and as such, retains its medium-term uptrend. A downtrend breakout during early April confirms a sustainable rotation into the listed market. However, the recent sharp outperformance in NYA versus COMP may need to take a breather, near term. 13

15 MSCI High Dividend vs Barra Momentum from June 2013 The High Dividend Index recently cleared above its key resistance along the late 2013 to early 2014 highs. Trading above confirms an ascending triangle pattern and suggests a rotation into this sector. The Barra Momentum Index has successfully bounced off from its crucial June uptrend near the low 2,000s. This action prevented a deeper correction and sets the stage for a retest of the recent March/April highs. Violation of its 200-day moving average and June 2013 uptrend is needed to confirms medium-term top. After underperforming its momentum peers over the past year, MSCI High Dividend has reversed direction and is now attracting new sponsorships. 14

16 Consumer Staples vs Consumer Discretionary from June 2013 A 1-year technical base breakout in early April suggests investors are seeking out defensive sectors such as Consumer Staples and high dividend yielding mega caps. In late January 2014, the violation of the June 2013 uptrend warned of a rotation out of Consumer Discretionary. But the subsequent bounce may be a false rally as it quickly ended during April. Watch the 200-day moving average as a convincing violation could warn of further distribution/selling pressure. S&P Consumer Staples has consistently outperformed S&P Consumer Discretionary since late February A continuation of this trend would suggest either the maturing of the stock market/business cycle or that long-biased money managers are hiding in the safety of defensive sectors. 15

17 Large Cap (RUI) vs Small Cap (RUT) from June 2013 Violation of key neckline support, 39.2% retracement of Aug 2013 to Mar 2014 rally and the 200-day ma at confirm a major Head & Shoulders top breakdown. Trading above and above 202 alleviates the strong selling pressure. The REIT Index (DJR) continues to trend higher as evidenced by a higher high pattern as well a technical breakout above 282 earlier in the year (Feb). The above technical developments support the basis for a rotation into high dividend yielding and lower beta sectors. HGX has relatively underperformed DJR since the beginning of the year. However, over the past 3 months, this trend has accelerated via the steep downtrend channel. The ability to break out above the top of its channel helps to stabilize the selling pressure. 16

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19 Contact Information Peter Lee UBS Financial Services Inc Ext 01 UBS Financial Services Wealth Management Research NY, NY