h Equities Sales Trading Commentary Technical Analysis Weekly Comment Global Michael Riesner Marc Müller 20/10/2015 michael.riesner@ubs.com marc.mueller@ubs.com +41-44-239 1676 +41-44-239 1789 Trading Top This Week Take Profits Below 2020! US Trading: With the break of the pivotal mid-september high at 2020, the SPX is extending its October bull run and on track with our recent comments the market is one way of testing our initial rebound target at 2045. However, after the vertical bounce in cyclical themes the market is short-term overbought and with last week's new reaction high in the SPX we are getting initial divergences in our fast momentum work, which is short-term toppish. Together with some key sectors facing important resistance (NDX, SOX and high yields) and heading into the time window of a minor top projection, we expect the market to move into a trading top this week, followed by a pullback into early November before resuming the underlying medium-term recovery cycle into year end. On the upside, our SPX target for a later October trading top remains at 2045 to best case 2060. The latter represents the 200- day moving average which we continue to see as a key level in Q4. In a later October/early November pullback we see the SPX vulnerable to pulling back towards 1970 to worst case 1960/1950 before we expect the market to start a new bounce into later December as a classic year-end rally. Consequently, as an aggressive trader we would use further strength and/or a rebreak below 2020 as a trigger for profit taking. Investors should continue to focus on buying the dips into early November!! On the sector front, our focus remains on cyclical themes. We see biotech vulnerable for new lows into early November, which however should be a buying opportunity as well. US Strategy: It was a key call of our 2015 strategy to expect a short and sharp correction cycle in global equities from a deeper summer top into a late Q3/early Q4 risk bottom as the basis for starting another significant rally into H1 2016, which a) should be led by a broad recovery/rally in cyclical sectors, and b) where we should see selective new highs in global markets. After having seen selective new lows in the US and global equities, the late September bullish reversal represents in our view our suggested 2015 major risk bottom. Most of Europe and the MSCI World have completed a wave 5 bear cycle, the EM complex has completed a classic double bottom, commodities and inflation expectations are bouncing, and in cyclical sectors we have a broad based recovery underway. Apart from tactical pullbacks, as long as we do not see this macro trade reversing we remain bullish biased and expect a new SPX high with target 2200 to best case 2300 into H1 2016. European Trading: The momentum in Europe remains weak relative to the US, and most of the European headline indices were not able to hit a new reaction high. Following our call on the US market, with the Euro Stoxx near to complete an impulsive rebound leg we see Europe vulnerable for a tactical pullback from a short-term trading top this week into first week November before starting its next rebound leg into year end. On the upside, the Euro Stoxx remains short-term capped at around 3300. Into early November, we see the risk of a pullback to 3150 to worst case 3100. Into later Q4 we continue to see a test of 3400 to 3470, which is the broken 200-day moving average. Given this scenario we see the rest of year more in the context of a trading market instead of expecting any bigger trend moves. Sector-wise, the rebound in Europe has been selective, which explains the slight underperformance versus the US. Miners, oil, technology, utilities and banks are overbought after the strong bounce of the recent 2 weeks and our focus remains on buying the dips in these sectors; whereas the patterns in chemicals, travel, telecom, healthcare and construction remain weak, where into early November we wouldn t even rule out a temporary negative surprise in these underperforming sectors. Inter Market Analysis: Over the last 3 weeks we received several questions from clients about what would happen if the late September bottom in risk does not hold? With the strong rebound in equities and particularly in Emerging Markets, the rebound in inflation expectation, the long signal in cyclicals versus defensive, and the tactical short signal in the US dollar, we have a relatively clear and consistent reflationary trade in global markets underway. A break of the September low and cyclicals reversing their recent rally would send out a super deflationary message and if so it would be the fall into a real bear market. So we clearly know at which point when something goes wrong to make a huge U-turn in our underlying strategy. Asian Corner: After the strong bounce of the last 3 weeks, most of Asia and Emerging Markets are overbought short-term. We expect a near-term pullback into early November but on the back of US dollar correction call into year-end our mediumterm bias on EMs remains bullish and expect higher prices into later Q4. We would buy the dips. NOT FOR DISTRIBUTION INTO THE U.S. UBS 1
US Equity Market Update: Chart 1. ) S&P-500 Daily Chart Chart 2. ) S&P-500 with NYSE McClellan Oscillator Chart 3. ) S&P-500 Daily Chart Short-Term Toppish! After the aggressive rally leg of the last 2 weeks, we highlighted last week the increasingly overbought market stance but we also argued that on a short-term basis something on the upside would be missing into later October before we see a short-term pullback starting. After a two-session pullback last week, the SPX hit a new reaction high. On the one hand this resulted in a break of the pivotal mid-september high at 2020, which in our cyclical model triggers a bull signal into year end. However, in our fast momentum indicators the new reaction high is forming a divergence, which suggests that on a short-term basis the market is vulnerable for a pullback. Our medium-term view is unchanged. In the bigger picture, the August/September bottom in the SPX represents a major tactical bottom and we continue to think that this is the base for a bigger recovery cycle into H1 2016 where we continue to see the SPX minimum hitting a marginal new high. However, this recovery cycle will be selective and therefore not a one-way. Keep in mind, with the 2015 correction cycle the technical damage in the US and globally was high. The SPX has broken its 2011 bull trend, and most markets globally are trading below their broken 200-day moving average. Both the broken trend and 200-day moving average will be at least a capping factor for the current recovery in equities. In this context, after the strong bounce of the last 2 weeks, we see the US market vulnerable for a short but potentially significant pullback into early November where the SPX should nonetheless post a higher low as the basis for a classic year-end rally. Conclusion: On the upside, our SPX target for a later October trading top remains at 2045 to best case 2060. The latter represents the 200-day moving average, which we continue to see as a key level in Q4. In a later October/early November pullback we see the SPX vulnerable to pullback towards 1970 to worst case 1960/1950. We would see a potential early November bottom as the basis for a new rally leg into later December as a classic year-end rally. Consequently, as an aggressive trader we would use further strength and/or a re-break below 2020 as a trigger for profit taking. Investors should continue to focus on buying the dips into early November! On the sector front our focus remains on cyclical themes. Biotech we see vulnerable for new lows into early November, which however should be a buying opportunity as well. NOT FOR DISTRIBUTION INTO THE U.S. UBS 2
US Equity Market Update: Chart 4. ) Nasdaq Composite Daily Chart Chart 5. ) US Semiconductor (SOX) Daily Chart Outperformer Facing Resistance! It does not matter whether it s the Nasdaq, semiconductors, oil stocks or on the macro side, high yields. After the huge and nearly vertical rally leg of the last 3 weeks the outperformer sectors/themes are overbought and facing strong resistance with the broken 200-day moving averages and the former key support zones from summer. Together with forming initial divergences in our fast trading indicators, we see these sectors vulnerable for a pullback, which however, should clearly form a higher low into early November. In the bigger picture such a higher low would be a bullish trend continuation pattern and underpin the medium-term bullish pattern setup in these sectors. As an aggressive trader we would use the first significant reversal this week to take profits. For investors, a potential pullback in the next 2 weeks we would use to buy/add. Chart 6. ) IBOXX High Yields Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 3
US Equity Market Update: Chart 7. ) US Broker Dealer Index (XBD) Daily Chart Chart 8. ) US Biotech (BTK) Weekly Chart Underperformer Still Vulnerable!! On track with our underlying view and early October strategy update, the focus of the first rally leg in the US was clearly on cyclicals and in the historical context, extremely oversold commodity sectors. On the other hand defensives and particularly healthcare, biotech, and a bit surprising, also financials underperformed. Last Thursday and Friday we saw aa catch-up rally in the recent underperformer. Having said that, the rebound in financials and healthcare has a rather corrective style and we see last week's bounce as just a wave C, so that further upside in banks, broker stocks, and healthcare should be limited. More importantly, if we are correct with our overall market view and we get a short-term pullback into early November, we see the recent underperformer, on the back of their corrective and weak rebound, vulnerable for another temporary negative surprise into early November. We wouldn t be surprised to see a re-test of the late September bottoms in the XBD and DRG, which we nonetheless see in the context of a major basing patter. US Biotech Still Vulnerable But! Chart 9. ) US Biotech (BTK) Daily Chart The US biotech sector was one of our key short recommendations for our 2015 summer correction scenario/call. In Q1 we highlighted the record high overbought stance in our weekly trend work and together with the over positioning of investors in this hyped sector we saw the risk of a big washout into later Q3/early Q4, before starting another and potential final bull wave into H1 2016. It is interesting to see that after the 27% correction in the BTK, our trend work has moved rapidly from a record high overbought stance into a record oversold position. Tactically, it clearly suggests that this sector is moving into a buying opportunity for a significant rebound into H1 2016. The problem is that during the recent market bounce biotech has been a strong underperformer, which suggests the risk of another but potential final down leg before starting a more significant rebound. Keep in mind, the whole rebound in the BTK has been so far relatively flat. Even if we were to see another rebound this week, with expecting the overall market to pullback in the next 2 weeks we wouldn't be surprised to see a new down leg starting in the BTK. Sentiment-wise, this could trigger a real capitulation and from a price perspective the BTK could finally reach our 3100/3000 target projection, which we gave out in Q1 as the target of our suggested 2015 correction cycle. NOT FOR DISTRIBUTION INTO THE U.S. UBS 4
Inter Market Update: What If We Are Wrong? It was a key call of our 2015 strategy to see a sharp and short correction in global equities over summer before starting a new tactical bull cycle, which in the SPX should represent a wave 5 of a larger degree. In this context it was and still is our call that the summer sell-off was just a correction and not the beginning of a bear market. Admittedly, the corrections we have seen in other parts of the world, particularly in Asia, Emerging Markets and also in Europe, went beyond that which we can describe as a correction. With corrections of more than 20%, these markets have effectively reached bear market status. So the key question is whether globally we are probably already in a bear market where the current recovery cycle is in most parts of the world just a bear market rally; whereas in the SPX we could still see a new high before the US market also gets a bigger problem next year. Over the last 3 weeks we received several questions from clients about what would happen if we are wrong with our medium-term bull call of seeing a larger rally/rebound into H1 before in H2 2016, so that late September bottom in risk would not hold? Generally, with the sharp bullish risk reversal in late September we actually have a very consistent picture in global markets. The MSCI World, and the underperformer markets that have hit a new low into later September, have completed a wave 5 bear cycle. The MSCI Emerging Markets has completed a classic double bottom. In the US, inflation expectations have bounced after a successful test of the January low as a pretty pivotal and very obvious support. On the sector front we got a sharp and consistent bullish reversal in cyclicals versus the SPX and versus defensives, and on the macro side the US dollar has completed, as the trigger for a rebound in commodities. All this reflects a relatively clear and intact reflationary trade in global markets. Furthermore, in the US bond market we actually do not see that much volatility (which is surprising to us) but it is particularly the Chart 10. ) US Cyclicals versus US Defensives February low in the US 10-Year Treasury Yield, which is a key level in our cyclical model. A break of 1.65% would be rather bullish bonds and indicate that the US 10- Year Treasury Yield would be on the way of minimum retesting its summer 2012 bottom. This is definitely not our favored scenario, but with all these very obvious patterns and pivotal levels in our cyclical model we get a clear message for global markets. If all this does not hold we have a big, big problem in global markets! Conclusion: Given the consistency of the technical signals, the late September low is confirmed as a major bottom and in this context we are and remain bullish risk with expecting selective new highs in the US and global equities into H1 2016. However, apart from any tactical calls, strategically, we clearly know where we are wrong and in this case the 2015 summer correction would have been not just a correction, it would de Chart 11. ) CADUSD Weekly Chart facto the ultimate start of real bear market!! A break of the SPX August/September double bottom would very likely suggest a new low in global equities. The whole rally in cyclical sectors would fail and fall to pieces, and with such a breakdown, inflation expectations would also make a new low. In this kind of environment it would be very likely to see a new breakout in the US dollar; whereas on the bond side the US 10-Year Treasury Yield would very likely break its February low at 1.65%. Translated into macro, this would send out an aggressively deflationary message, which indeed would be super bearish risk and it would mean that global equities are in a real bear market. So if something goes wrong in global markets we think we know at which point we have to make a U-turn in our NOT FOR DISTRIBUTION INTO THE U.S. UBS 5
Inter Market Update: Chart 12. ) US Inflation Expectation versus S&P-500 Inflation expectations in the US have reversed exactly on their January low, which is a key level and makes this level to an even more important and obvious support on the macro front. In the current set up we actually see inflation expectations forming a potential bottom and a breakout would be further bullish risk!! However, if this basing process should fail and we would see a break of the January low, it would send out a super deflationary message!! Chart 13. ) US 10-Year Treasury Yield Daily Chart Chart 14. ) MSCI World Daily Chart The current surprise on the macro side is that despite the strong bounce in risk and the consistent picture of a reflationary trade in global markets, we see almost no market reaction in bonds. Someone who is generally bearish risk could argue this is the confirmation that the rally in risk is not real or sustainable. Objectively seen, the February low in the US 10-Year Treasury at 1.65% represents a major bottom in our cyclical model!! We thought and continue to think that this low is the basis for yields to move higher into H1 2016 and the current macro environment would indeed suggest yields to move higher. However, what would happen if the Treasury breaks its February low? From a cyclical aspect this would trigger a bear window for yields (bullish bonds) into 2017, which de facto means that we would have a bullish bias in bonds into 2017!! From a macro perspective you could only justify this kind of move with a highly deflationary macro background!! In this context, analytically, the level of 1.65% in the US Treasury represents a key variable for us to know whether we are in a reflationary or deflationary macro environment. Last but not least we have the MSCI World, which has completed an impulsive wave 5 bear cycle in late September. Even if were to say that this impulsive bear wave is just the first bear wave of a bigger bear cycle, the October rally we would actually favor to be just the start of a more complex and longer lasting rebound pattern. Nonetheless, a break of the late September low (it does not matter when) would be a rather bearish message for global equities and in this case we would clearly have to make a U-Turn in our strategy towards a more bearish trend pattern. NOT FOR DISTRIBUTION INTO THE U.S. UBS 6
Asian Corner Update: Asia/Emerging Markets Bullish But Overbought! After the aggressive bear cycle and the massive underperformance we anticipated a major late Q3/early Q4 tactical bottom in the EM complex with expecting the US Dollar starting a several months correction versus the Asian currency pairs, the EM complex and versus the commodity block. With a high momentum rally we got classic bottom breakouts in the MSCI Emerging Market and Hang Seng, which completed major double bottoms. In China, the SSEC is near to break its next resistance at 3400, which would suggests a move to 3800, as our next target projection. In Korea, the KOSPI has broken its 2015 bear trend and also relative to the world we see a first breakout, which is a first sign of improvement as this effectively breaks the 2011 underperformance trend of Korea versus the world!! However, after the aggressive rally of the last 3 weeks, Asia and Emerging Markets are obviously overbought and with initial divergences in our fast momentum work, and the volume pretty much lagging the breakout we see the risk of a short-term pull back into early November before starting its next bull wave into year-end, where we generally expect to see more relative strength on the back of our underlying US Dollar correction call, which is bullish commodities and Emerging Markets. A break of 880 in the MSCI Emerging Market (38% retracement of the 2015 bear cycle) would imply a test of the 200-day moving average at around 930 to 940 into year end. We stay bullish and would buy the dips!! Chart 15. ) MSCI Emerging Market Daily Chart Chart 17. ) KOSPI Daily Chart Chart 16. ) Hang Seng Daily Chart Chart 18. ) KOSPI versus MSCI World NOT FOR DISTRIBUTION INTO THE U.S. UBS 7
European Equity Market Update: Lagging Versus the US Market The momentum in Europe remains weak relative to the US, and most of the European headline indices were not able to hit a new reaction high. Following our call on the US market, with the Euro Stoxx near to complete an impulsive rebound leg we see Europe vulnerable for a tactical pullback from a short-term trading top this week into first week November before starting its next rebound leg into year end. On the upside, the Euro Stoxx remains short-term capped at around 3300. Into early November, we see the risk of a pullback to 3150 to worst case 3100. Into later Q4 we continue to see a test of 3400 to 3470, which is the broken 200-day moving average. Given this scenario we see the rest of year more in the context of a trading market instead of expecting any bigger trend moves. Sector-wise, the rebound in Europe has been selective, which explains the slight underperformance versus the US. Miners, oil, technology, utilities and banks are overbought after the strong bounce of the recent 2 weeks and our focus remains on buying the dips in these sectors; whereas the patterns in chemicals, travel, telecom, healthcare and construction remain weak, where into early November we wouldn t even rule out a temporary negative surprise in these underperforming sectors. Chart 19. ) Euro Stoxx 50 Daily Chart Euro Stoxx 50: Last week saw a limited pullback followed by another attempt to resume previous strength, which we expect to move into a tactical top this week. In terms of price, the index is moving into its first bigger resistance area at 3266/3326, and the short-term situation suggests the risk of a momentum divergence developing. This would be short-term toppish, and after completing a tactical reversal, our favored scenario for this week would be the beginning of a pullback into early November. Last week's intraday low at 3178 represents the first technical support, whereas a somewhat deeper pullback towards 3150/3100 represents our short-term worst case scenario. Chart 20. ) FTSE Mid 250 Daily Chart FTSE Mid 250: It does not matter whether we look into Germany, Swiss small and mid-caps or into the UK, European small and mid-caps were generally relatively resilient during the Q3 market correction. The question is whether small and mid-caps are just lagging in topping out versus large caps or if the trend in the boom theme of the last few years is still fully intact, so that into H1 2016 we could still expect another positive surprise. The answer to this question we should get very soon from the FTSE 250 mid and we see this as a very good indication for the underlying trend in Europe. From a pattern standpoint the FTSE Mid is moving into the apex of a huge triangle formation (currently in neutral status), so that a breakout decision should be generally not too far away. A break of the 2015 down trend would trigger a clear buy signal whereas with a bigger set back the market would clearly challenge its 2011 long-term bull trend!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 8
European Equity Market Update: Chart 21. ) FTSE-100 Daily Chart FTSE-100: First signs of a consolidation below the May downtrend line developed last week. We expect a real attempt to clear the May trend to come on the agenda after a consolidation into early November. Given the recent relative improvement in energy and mining related themes, the FTSE remains for us an outperformance candidate over the course of Q4 and we continue to see pullbacks as opportunities to accumulate. First support zone is at 6268/6250, whereas a 50% retracement move of the previous rally leg at 6165 could represent a worst case scenario in terms of price. Chart 22. ) DAX-30 Daily Chart Chart 23. ) Swiss Market Index Daily Chart DAX-30: Momentum in the DAX is slowing and similar to most other European headline indices, a momentum divergence on a daily chart basis is forming, which is short-term toppish. The next minor resistance is at 10336, whereas an extension towards 10512 is for this week the less likely scenario. A tactical top developing at around or below 10336 is likely, and a down day would cement the developing momentum divergence so that the focus into early November is on a pullback campaign. The first significant short-term support is defined by last week's intraday low at 9890. If we were to see a pullback toward the minor September bottom, the short-term risk would be toward 9745. Swiss Market Index: Last week's marginal gain in the SMI didn't change the short-term picture. The big overhead resistance zone at 900/9170 is not within striking distance, which keeps the index caught within a wide trading range, and we continue to see short-term bouncing in the defensive heavyweights as limited. Into the pullbacks our focus remains on cyclical themes, whereas the index view is unchanged and the likelihood is high that the SMI will remain caught within its most recent range of 9000 to 8250 in the period ahead. NOT FOR DISTRIBUTION INTO THE U.S. UBS 9
STOXX Europe 600 Index Sector Overview: NOT FOR DISTRIBUTION INTO THE U.S. UBS 10
Weekly Technical Indicators: (Source: Pinnacle Data, Datastream) Charts: Metastock NOT FOR DISTRIBUTION INTO THE U.S. UBS 11
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