h Technical Analysis Weekly Comment Equities Sales Trading Commentary Global Michael Riesner Marc Müller 16/07/2013 michael.riesner@ubs.com marc.mueller@ubs.com +41-44-239 1676 +41-44-239 1789 SPX/Risk Toppish. Sell Into Strength!! US Trading: On the back of Bernanke s dovish comments we saw further strength in the US and on a daily closing basis the SPX hit a new all-time high, which was surprising to us. We see Bernanke s comments as an external market shock, which is just extending the late June bounce instead of seeing it as the basis for a new sustainable breakout. On the sentiment side, the AAII Bearish consensus has hit a multi-year low. Our momentum work has reached overbought extremes; and on the indicator side we have several divergences not confirming the new SPX high, which suggests the US market is heading into a more important trading top near-term! From a cyclical perspective we actually saw the May setback run into a first half July trading low followed by a final bounce into a major late July/early August top as part of a larger distribution pattern. Given the fact that the last trading low came in significantly earlier than favored the likelihood is high that our expected major top will come in earlier than late July/early August and in this context we would see the next bigger reversal in the SPX as the beginning of a more important correction leg into late Q3/early Q4. Short-term we cannot rule out a final overshot towards 1700/1720 but we are sticking to out last week s comment and would not chase the SPX on a broader scale. A daily re-break below 1654 would be initially negative, implying that a more important trading top is in place, and if so it would suggest a first correction leg towards 1560/1536. US Strategy: With hitting a new all-time high the SPX continues to massively outperform world equity markets. However, global equities topped out in May. The recent rebounds in Asia, Europe, and Emerging Markets are just corrective and together with a still vulnerable inter-market setup we also see the US market trading in the late stages of its March 2009 cyclical bull market. In this context we continue to see the risk of a first 10% to 15% correction leg (wave a) into late September/early October as only the start of a complex a-b-c correction pattern. European Trading: Bernanke s dovish comments have been extending the late June rebound but Europe continues to underperform the US, which leaves the corrective shape of the whole late June rebound unchanged. We continue to see the outperforming DAX, FTSE-100, OMX, and SMI posting a lower high versus their May top and last week the underperforming periphery already triggered a new momentum short signal. The Euro Stoxx is extending its countertrend wave c, which suggests a trading top this week. On the upside, the Euro Stoxx should be capped at 2717, whereas a re-break below 2666 would be initially negative and imply that a more important trading top is in place. Sell into strength or a re-break below 2666!! Inter Market Analysis: After having reached/overshot our 2.40%/2.50% target in the US 10-Year Treasury and in line with our cyclical models we continue to see the next bigger move in yields on the downside. With a larger bullish divergence forming in our daily trend work it s just a matter of time before we see a break of 136 as the trigger for a tactical countertrend rally towards 142, best case 147 into October. The German Bund has already triggered our anticipated tactical long signal and the market is bullish-biased into early Q4 as long as trading above its June low at 140. Buy into weakness. Asian Corner: Although the recent trading low came in earlier than favored we see the current rebound in Japan fully in line with our base case scenario of the Nikkei and the USDJPY undergoing a corrective and classic a-b-c correction process into late Q3/early Q4 before starting the next bull move of a larger degree. We see the Nikkei near to completing a countertrend wave b, which suggests the risk of a second correction leg down towards 12500 (worst case 11400) into late Q3. We recommend traders to sell into strength or a daily break below 14100. In line with our recent call we see China and Emerging Markets bouncing but the rebound has so far a rather corrective character, which basically suggests more weakness ahead. We still think it is too early to buy and expect new lows into later Q3/early Q4, which however, should bring us a big buying opportunity in Aria and Emerging Markets. NOT FOR DISTRIBUTION INTO THE U.S. UBS 1
US Equity Market Update: SPX Extending Its Bounce But Don t Chase Higher!! Tactically, we recently said that the May setback in US equities was just the first part of our anticipated bigger summer distribution pattern. However, we recently also said that given the fact that global equities and the H1 defensive boom sectors topped out in April/May we thought the SPX will have problems providing another positive surprise and marking a new high into later July/first half August. On a daily closing basis the SPX hit a new all-time high last week and continues to aggressively outperform the world. Does this change 1) last week s call not to chase the market on the upside, and 2) does this change anything of our expected bigger correction scenario for the US market into early Q4? From a pure timing perspective last week s new all-time was surprising for us, and it means that we were wrong with our short-term timing since we actually thought the May correction would move into a first half July low before starting the next and potentially final move higher into our anticipated late July/early August major price top. However, the changed short-term timing does not change the big picture so it was and still is our believe that the US market moves into an important summer top and given the fact that the last up leg has started somewhat earlier than favoured suggests that we could also see our anticipated major market peak to come in slightly earlier as our favored late July/first half August timing. In May the US market was overbought but we said that for a high conviction bear call we would actually need to see, 1) a classic distributive price pattern, and 2) the classic divergences in market breadth and/or other price indicators, which were still missing in May. With last week s marginal new all-time high in the SPX we now have a growing number of non-confirmations in place. The VIX has not confirmed the new high in the SPX. In our daily trend work, as well as on the weekly momentum side we have non-confirmations forming and on the market breadth side the lower number of new 52-week highs and a divergence in the Advance/Decline Volume Line represents the kind of divergence that so far has been missing to confirm that a bigger market top is underway. Conclusion: We see last week s rally on the back of Bernanke s dovish comments as an external market shock that just extends the late June bounce, so we do not think that the current move represents the basis for a new sustainable breakout, which means in the longer-term context we still see the current bounce as part of our anticipated bigger summer distribution pattern. On a short-term basis our momentum work (Chart 2.) has reached overbought extremes and key sectors (Russell-2000, OSX, DJT) are facing strong resistance. Together with the sentiment hitting extreme levels (AAII Bearish Consensus at a multi-year low) and the growing number of non-confirmations on the indicator side we see the US market close to hitting an important top (Dow Jones near to complete a wave 5 of a larger degree see chart 8.) and it should be the top we actually expected to see in late July/first half August. On a short-term basis we cannot rule out a final overshot towards 1700/1720 but we are sticking to our last week s comment and would not chase the SPX. A daily re-break below 1654 would be initially negative, implying that a more important trading top is in place, and if so it would suggest a correction towards 1560/1536 into later August. Chart 1. ) S&P-500 Daily Chart Chart 2. ) S&P-500 Daily Chart with NYSE McClellan Oscillator NOT FOR DISTRIBUTION INTO THE U.S. UBS 2
US Equity Market Update: The Number of Divergences is Growing!! Into the May top we saw globally a lot of markets and in particular the H1 defensive/value boom sectors moving vertical. In May we said that after these exhaustive moves it is just a matter of time before we see a stronger correction as first part of a larger distributive pattern. The only question was how long a potential distribution would last and in this context we said that for a high conviction bear call we would actually need to see, 1) a classic distributive pattern on the price basis, and/or 2) the classic divergences in market breadth or other price indicators, which were still missing in May. Given the bubble character of the moves in the bond proxy stocks and the disaster in Emerging Markets, we thought that it would be difficult for the SPX to hit a new high into summer and produce the kind of divergence that has still been actually missing. However, with last week s marginal new all-time high in the SPX we now have a growing number of non-confirmations in place, which all in all suggests that the US market is on the way to a more important top. The VIX has not confirmed the new high in the SPX and in the meantime we have the same kind of big divergence in place as prior to the 2007 major market peak. In our daily trend work (chart 1.) as well as on the weekly momentum side we have a bigger non-confirmation forming, and on the market breadth side the lower number of new 52-week highs and a divergence in the NYSE Advance/Decline Volume Line represents the kind of divergences that so far have been missing to confirm that a bigger market top is underway. Conclusion: A new high in the Russell-2000 actually suggests that the breadth in the US is still brilliant but this is misleading. With the reversal in the US bond market we Chart 3. ) S&P-500 with NYSE 52-Week Highs have a lot of interest sensitive stocks and sectors that have already topped out (utilities and housing is just one example), and these stocks and sectors specifically are now missing to further contribute on the upside. At the end of the day we think we are just following a very classic inter-market cycle where first the bond market tops out with all interest rate sensitive sectors, and after a certain time lag the overall market follows and corrects or moves into a bear cycle. In this context we do not believe in the thesis that you can make a difference between a good and bad style of rising rates. At the end of the day it s all just a matter of price levels so that a market/economy will adapt to too-low interest rates. So if they start rising significantly from very low levels it should have the same kind of negative effect (with a time lag) as if they were to rise from a higher level. Chart 4. ) S&P-500 with NYSE Advance/Decline Volume Ratio Chart 5. ) S&P-500 with VIX Index NOT FOR DISTRIBUTION INTO THE U.S. UBS 3
US Equity Market Update: Chart 6. ) Russell-2000 Daily Chart DJI Near to Complete Wave 5!! The Russell-2000 is trading at the upper end of its longterm bull trend channel, which usually caps a market. Together with the exhaustive style of the recent rally and our momentum work hitting overbought extremes we would not chase this market. On the contrary, a re-break below 1008 would be initially negative and imply that a more important top is underway!! Chart 7. ) Dow Jones Transport Daily Chart Other key sectors such as OSX, DRG and/or DJT are facing high strong resistance with the intact May. Even if we were to see a marginal break of the May high in the transport sector we would still see this as part of a distributive pattern, similar to the toppish pattern in 2011 prior to the significant correct cycle into summer 2011. Chart 8. ) Dow Jones Industrials Daily Chart With the break of the June 18 th lower reaction high at 15322, the May/June setback in the Dow Jones Industrials has a corrective character, which in hindsight qualifies the recent correction pattern as a wave 4. If this is correct then we currently see the Dow Jones Industrials trading in a wave 5 of a larger degree and the divergence in our daily trend work is confirming this count. However, if this wave count is correct this has significant implications for the overall market. 1) It would suggest that the US market is not far from its final top, which supports our thesis that we see an earlier top than our favored first half August top. 2) A correction starting from a near-term top would be a correction cycle of a larger degree, which suggests seeing at least a 38% to 50% correction of the last underlying bull cycle that started in June last year. If so, this would imply a Dow target at 14200 to 13800, which would roughly represent a 9% to 13% correction from a potential top around 15600. NOT FOR DISTRIBUTION INTO THE U.S. UBS 4
US Equity Market Update: Chart 9. ) XBD Daily Chart Financials Toppish! Financials have been very strong and outperforming the overall market. We are sticking to our last week s comment and see banks and broker stocks trading in a wave 5 of a larger degree, and with a divergence forming in our daily trend work we have just another indication that the next bigger tactical move in financials will be down. Conclusion: The long-term structure in financials is bullish but tactically we would be a seller into strength as we expect a significant correction/back to the mean cycle in banks and broker stocks into late Q3/early Q4. Chart 10. ) HGX Daily Chart Last week s bounce on the back of Bernanke s dovish comments was nice but it does not change the corrective character of the bounce in the housing sector. The HGX remains our key short call and in this context we expect a break of the 174 key support into August. We reiterate our recent call and would sell into strength. Chart 11. ) Dow Jones Utilities Daily Chart Completing an impulsive bear structure is long-term bearish but it nonetheless suggests that after having completed a wave 5 structure the next bigger tactical move will be countertrend and in this context the utilities sector was one of our key bounce candidates. With the Friday session the DJU has met our first target at 500, and with the break of this level the sector is heading towards 510, which is the 62% retracement of the April/June bear cycle. With our daily momentum reaching overbought extremes the air on the upside is getting increasingly thin. We would sell the first significant bearish daily candle and/or a re-break below 500!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 5
Inter Market Update: Sentiment Getting Toppish For Equities With last week s continued rally the sentiment in equity markets has been further improving into contrarian territory. With a very low reading of 18% the AAII Bearish Consensus has reached a multi-year low, where the market sooner or later usually runs into a problem. In the Bullish Consensus of the Investor Intelligence we have a bigger divergence forming, which is what we commonly see at important price tops. Keep in mind - it is a myth to believe that a market tops out euphorically and therefore with the most bullish sentiment reading. Similar to other technical indicators we very often see bigger non-confirmations forming before the market moves into its ultimate top and this is exactly what we currently see in the AAII Bullish Consensus and the Bullish Consensus of the Investor Intelligence. Last but not least, take a look at the SENTIX Index. SENTIX is one of the biggest and most profound sentiment polls in financial markets globally with a very deep breadth in sentiment data across markets and styles. With last week s rally the SENTIX index for Europe has been hitting overbought extremes, which is just another piece of evidence that the sentiment picture for equities is getting increasingly toppish and it suggests that a) any further strength will be increasingly limited and, b) a more important tactical top is not far away. Chart 12. ) S&P-500 Weekly Chart AAII Bearish Consensus Chart 14. ) DAX-30 with SENTIX Index Chart 13. ) S&P-500 with Investor Intelligence Bullish Consensus Chart 15. ) S&P-500 with AAII Bullish Consensus NOT FOR DISTRIBUTION INTO THE U.S. UBS 6
Inter Market Update: Tactical Long Signal in Bunds!! It was one of our Q2 tactical key calls to expect a significant litmus test in the bond market (higher yields) into summer. The US 10-Year Treasury has met our target at 2.40% - 2.50% and overshot to 2.70% and is now testing a first important internal trend resistance from 2007. On the momentum side we have a larger bearish divergence forming and in this context, as well as following our cyclical roadmap we continue to see the next bigger tactical move in yields to the downside. So far the momentum of the current bounce in the T-Bond is weak but with a bullish divergence forming in our daily trend work it s in our view just a matter of time before we see a break of 136 as the trigger for a tactical countertrend rally towards 142, best case 147 into October. After breaking its may downtrend the German Bund has already triggered our anticipated tactical long signal, which makes the June 24 th low at 140 to a new pivotal support with some relevance for the long-term structure of German yields. Keep in mind, with the last yield high the 30-Year yield has failed at a key resistance at around 2.50%. A break of this level would suggest significant higher yields but as long as this is not the case we are talking about an intact long-term sideways range, which supports our view that the bond market is trading in a long-term bottoming phase, so that yields should remain on low levels. Conclusion: With a new tactical long signal in place the Bund is bullish biased into early Q4 as long as trading above its June low at 140. Buy into weakness. Chart 16. ) US 10-Year Treasury Weekly Chart Chart 18. ) German Bund Daily Chart Chart 17. ) US T-Bond Daily Chart Chart 19. ) German 30-Year Government Bond 3.80 GERMANY GOVERNMENT BOND 30 YEAR - RED. YIELD 3.60 3.40 3.20 3.00 2.80 2.60 2.40 2.20 2.00 1.80 1.60 J A S O N D J F M A M J J A S O N D J F M A M J J Source: Thomson Reuters Datastream NOT FOR DISTRIBUTION INTO THE U.S. UBS 7
Asian Corner Update: Corrective Rebound in Asia/Emerging Markets Although the recent trading low in Japan came in earlier than favored we see the current rebound in Japan fully in line with our base case scenario (see June 18 th weekly comment) of the Nikkei and the USDJPY undergoing a corrective and classic a-b-c correction process into late Q3/early Q4 before starting the next bull move of a larger degree. We see the Nikkei near to completing a countertrend wave b, which suggests the risk of a second correction leg down towards 12500 (worst case 11400) into late Q3. However, apart from any short-term tactical trading, our long-term view on Japan remains bullish. Japan trades in a new structural bull market and the current correction cycle (which is a classic mean reversion move that works off a too high distance to its 200-day moving average) that should end in Q4 we see as the basis for a next significant bull cycle into deeper 2014, where we expect the market to reach a level of at least 18350. So tactically we recommend traders to sell into strength or a daily break below 14100 but for investors the underlying trend picture remains bullish. In line with our recent call we see China and Emerging Markets bouncing but the rebound has so far a rather corrective character, which basically suggests more weakness ahead. Short-term we can still see some more bouncing but we are sticking to our medium-term cautious stance on Asia/Emerging Markets and think it is still too early to buy. We expect new lows into later Q3/early Q4, which however, should bring us a big buying opportunity in Aria and Emerging Markets. Chart 20. ) Nikkei-225 Daily Chart Chart 22. ) MSCI Emerging Market Daily Chart Chart 21. ) Nikkei-225 Monthly Chart Chart 23. ) Shanghai Composite Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 8
European Equity Market Update: Bounce Remains Corrective Sentiment is Toppish! Bernanke s dovish comments have been extending the late June rebound but Europe continues to underperform the US, which leaves the corrective shape of the whole late June rebound unchanged. We continue to see the outperforming DAX, FTSE-100, OMX, and SMI posting a lower high versus their May top and the underperforming periphery has already triggered a new momentum short signal last week. The Euro Stoxx is extending its countertrend wave c, which suggests a trading top this week. On the upside the Euro Stoxx is capped at 2717, whereas a re-break below 2666 would be initially negative and imply that a more important trading top is in place. Sell into strength or a re-break below 2666!! Chart 24. ) Euro Stoxx 50 Daily Chart Chart 25. ) IBEX 35 Daily Chart Euro Stoxx 50: From a pattern point of view, we continue to label the current strength from the late June low as a corrective bounce, which is now trading in the final wave c of a classic a-b-c countertrend formation. In terms of price we named last week the 61.8% retracement of the May-June decline at 2717 as the highest expected extension level for the current bounce. A test of that level is still pending and last week, the momentum on the index side started to deteriorate with a doji candle on Thursday and Friday s small daily reversal. Overall: From a pattern point of view and in terms of price, the bounce of the Euro Stoxx 50 is in a maturing phase and we currently do not have signals suggesting an overshooting in European equities, which continue to underperform the US indices. A daily close below 2666 would be initially negative and would create a tactical reversal pattern. IBEX 35 : Within Europe, the periphery remains under pressure and last week we got new momentum sell signals in Italy, Portugal and Spain. The IBEX continues to underperform and with last weeks significant reversal the market is generating a new momentum sell signal, which completes a perfect pull back to its 200-day moving average, so that 8112 now represents an even more obvious resistance. Conclusion: As long as the IBEX trades below 8112 the market remains short biased and given the corrective shape of the recent rebound we expect a soon re-test of the late June trading low at 7508. NOT FOR DISTRIBUTION INTO THE U.S. UBS 9
European Equity Market Update: Chart 26. ) FTSE-100 Daily Chart Chart 27. ) DAX-30 Daily Chart FTSE-100: Last week we flagged the relative breakout of the FTSE- 100 versus the STOXX Europe 600, and this call remains fully intact. With a tactical reversal in the mining sector in place, we expect this relative development to remain stable. Furthermore, the index is one of the very few indices within Europe, which has been able to exceed the 61.8% retracement of the May-June decline. However, the index is also showing a tactically overbought situation so that an immediate re-test of the last high at 6875 is not in the cards, and we continue to favor the FTSE-100 to produce a lower high. Due to an increasingly overbought situation we expect headwind in this week s trading, and a daily close below 6500 would suggest that a tactical reversal in place. DAX-30: After the successful break of 8037, the index extended its bounce and finished the week shy below the 61.8% retracement of the May-June decline at 8214. A reversal is so far pending but with the daily momentum approaching overbought levels, the air is getting thinner. If we get a reversal this week, this would reverse the bounce off from the late June low and it would produce the favoured lower high. All this would strengthen the medium-term view of a top building phase in the DAX. Chart 28. ) Swiss Market Index Daily Chart Swiss Market Index: On the single stock front, the picture has not changed in a significant way despite a few names hitting a new reaction high. The problem for the index is the fact that the mega-caps (banks/healthcare/food) look flattish relative to the SMI or are even underperforming, which means that this is a limiting factor on the index front. With most mega-caps well below their May high, we stick to the view that the May top in the SMI represents a significant turning point and the current strength should post a lower high. So far, a significant reversal day within the current bounce is pending and the index is struggling with the round number at 8000, where a series of doji candles is developing. NOT FOR DISTRIBUTION INTO THE U.S. UBS 10
STOXX Europe 600 Index Sector Overview: NOT FOR DISTRIBUTION INTO THE U.S. UBS 11
Exchange Traded Derivatives (ETD) Switzerland Most of above described Underlyings and Products can be traded using ETD s such as Futures and Options. Orders can be placed through our ETD Execution Desk. Options and Futures are financial instruments that can provide you with the flexibility you need in almost any investment situation (bearish, bullish and sideway markets) you might encounter. Following products could be taken into consideration to participate in the described trends: Name Typ Valor Nr Exchange Multiplier Currency E-mini S&P 500 Future 712045 Chicago, CME 50 USD Russel 200 Mini Future 1309731 Intercontinental, ICE 100 USD ishares Transportaion Avg ETF (IYT) Option 1698796 * 100 USD E-mini DJIA Future 1366284 Chicago, CBT 5 USD PHX Housing Sector Index (HGX) Option 1457177 * 100 USD ishares U.S. Utilities ETF (IDU) Option 1099987 * 100 USD 10 yr Note Future 274041 Chicago, CBT 1000 USD Bund Option&Future 954479 Eurex 1/1000 Euro US Long Bond Future 574527 Chicago, CBT 1000 USD Nikkei 225 Option&Future 998407 OSE 1000/1000 Yen USD Nikkei 225 Future 3061872 Chicago, CME 5 USD MSCI Emerging Marktes ( EEM) Option 1591176 * 100 USD Euro Stoxx 50 Option&Future 846480 Eurex 10 Euro IBEX 35 Future 998683 Madrid, MEFF 10 Euro FTSE 100 Option&Future 998185 London, NYSE LIFFE 10 GPB DAX Option&Future 998032 Eurex 5/25 Euro SMI Option&Future 998089 Eurex 10 CHF *CBOE, AMEX, Philadelphia, NYSE ARCE (Pacific), ISE, Bosten, Nasdaq, Bats, C2 Contact: Global Wealth Management & Swiss Banking Clients: +41 44 239 77 70 Institutional Clients & Family Offices: +41 44 239 15 55 For additional information visit: goto/etd-ch This information is not prepared for the needs of any specific recipient. It is published solely for information purposes and is not a solicitation or offer to buy or sell any securities or related financial instruments ( Instruments ). UBS is under no obligation to update the Information. Neither UBS nor any of its affiliates, or their officers or employees, accepts any liability for any loss arising from use of the Information. This information is not a basis for entering into a transaction. Any transaction between you and UBS will be subject to the detailed provisions of the term sheet, confirmation or electronic matching systems relating to that transaction. Clients wishing to effect transactions should contact their local sales representative. NOT FOR DISTRIBUTION INTO THE U.S. UBS 12
Weekly Technical Indicators: (Source: Pinnacle Data, Datastream) Charts: Metastock NOT FOR DISTRIBUTION INTO THE U.S. UBS 13
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