SPX Top in Place Deflationary Pressure Building! Due to traveling, the next regular weekly comment will be published on July 9 th.

h Technical Analysis Weekly Comment Equities Sales Trading Commentary Global Michael Riesner Marc Müller 25/06/2013 michael.riesner@ubs.com marc.mueller@ubs.com +41-44-239 1676 +41-44-239 1789 SPX Top in Place Deflationary Pressure Building! Due to traveling, the next regular weekly comment will be published on July 9 th. US Trading: From a cyclical perspective we expected the SPX to bounce from its early June trading low into a deeper June top before starting its next down leg into July; and given the increasing technical damage in key sectors, we said that this bounce would be capped, so that another positive surprise in the SPX would not be likely. The corrective June rebound has set a lower high and after a number of false breakouts and completed classic price tops in key sectors the SPX has broken its pivotal June 6 th low at 1598, which we highlighted as a tactical stop loss and short trigger. Short-term, the market is increasingly oversold and could bounce near-term but from a cyclical aspect we expect more downside into early July before starting a more significant rebound into later July/early August. After breaking 1598, the SPX is on track for 1538 worst case 1510. US Strategy: With breaking its November bull trend and its pivotal early June low at 1598, the SPX has generated a weekly short signal. Together with an intact short signal in the MSCI World (global equities topped out in May!!) and the extremely vulnerable picture on the inter-market side (Emerging Markets and commodities), we have growing evidence that the SPX has also topped out, which implies that our whole corrective bear scenario for the US market is shifting forward. Tactically, we expect a classic oversold bounce from a first half July low into late July/early August before starting a second correction wave. Although the SPX has topped out earlier than favored, late September/early October remains our favored timing for an important medium-term bottom as the basis for at least a strong Q4 countertrend rally, if not even the start of a new bull cycle. Our early October target for the SPX is at 1450 and a break of this level would call for 1380/1350 as a worst case scenario. European Trading: Tracking the ongoing underperformance versus the US market the June rebound in Europe was more or less non-existent, which was the setup for another big sell-off and further increasing technical damage. More or less all EU headline indices have broken their 200-day moving average, which is structurally bearish. The OMX and SMI have broken their 2011 and 2012 bull trends, whereas the DAX, AEX, and the STOXX-600 are testing these pivotal trends this week. On a short-term basis we could see an oversold bounce but looking at our cycles we expect to see more weakness into early July before seeing a more significant bounce into late July/early August. Inter Market Analysis: Over the last few weeks we have been highlighting the increasing deflationary flavor in financial markets. With inflation expectations and the Emerging Markets in free fall and following the pre 1997 Asian Crisis pattern, equities and commodities under pressure, and a big reversal in the US dollar we have almost all ingredients for a deflationary bear cycle. What is still missing is a bullish reversal in the bond market. With having met our 2.40% to 2.50% target the US T-Bond is on track to moving into our projected summer bottom as the basis for a significant rebound into later Q3. Buy bonds and buy the US dollar into any weakness!! Following the deflationary macro picture, gold has broken its April bottom and sold off to its next big support at $1300/1275. A break of the latter would call for a worst case correction target at 1150. Gold is now record high oversold on a daily basis and on the back of expecting bonds moving into a bottom and gold running into its seasonal low we see the yellow metal near to an important low as the basis for a rebound into initially August. Asian Corner: After the failed May rally and the subsequent break of its pivotal April/May double bottom at 2161 the Shanghai Composite/China is in free fall but has successfully tested its December low at 1950. Nearterm the market is oversold and could bounce. However, given the impulsive structure of the current bear cycle we see China in the same bear cycle as the Western markets, which suggests that after a significant and corrective rebound from a first half July low into early August we expect more downside into early Q4 as the basis for the next larger bull cycle. Sell into rallies! NOT FOR DISTRIBUTION INTO THE U.S. UBS 1

US Equity Market Update: After Breaking 1598 the SPX Top is in Place!! It was a mixture of a couple of factors that caused us to believe in a major equity top in the US market and world equities this year. After the H2 2012 rally, the US market generally started into this year from a very high basis (in January the SPX was already overbought on all timeframes). In the meantime, the March 2009 cyclical bull-market is the 7 th longest bull market since 1900, and with moving into the most challenging part of the Presidential cycle (73% likelihood to see a bear market in the 2013 2014 timeframe) as well as following our cyclical roadmap for 2013, we expected the US market to move into a big summer top as the basis for a corrective (developing in 3 waves) and limited (15% to 20% correction) bear cycle into finally Q1 2014 as the potential setup for a new bull market into 2015. However, over the last few weeks we highlighted the rapidly deteriorating technical background on the macro side with the threat to see a deflationary shock via the very bearish pattern set in Emerging Markets. On the back of our call that world equities (Japan and the Asian boom markets) have topped out in May we said last week that it will be very difficult for the SPX to hold up a distributive pattern until late July/early August. Given this picture it was increasingly likely to see the SPX topping out in June and in this case it would be very likely that our whole correction scenario would shift forward. Where do we stand now? From a cyclical aspect we saw the SPX moving into a deeper June top before starting its next down leg into July; and given the increasing technical damage in key sectors and on the macro side we said that this bounce would be capped with an increasing likelihood to see a subsequent break of the early June low as the ultimate confirmation that a more important top is in place. With last week s sell-off, the SPX has broken its November bull trend. In a number of key sectors we have false breakouts (Russell-2000, NDX, SOX) and completed price tops (BKX materials, DRG) in place, and with the break of the pivotal June 6 th low at 1598 our cycle work has turned short. Short-term, the market is increasingly oversold and after the two 90% down volume events last week we could see a near-term bounce. However, looking at our cyclical roadmap we expect to see more downside into early July (next week, at the latest second week June) before starting a more significant rebound into later July/early August. After breaking 1598, the SPX is on track for 1538 worst case 1510. Strategically we have growing evidence that the SPX has topped out, similar to global equities. The SPX has broken its November bull trend and we have a fresh weekly sell signal in place. So even if we were to see another big bounce into late July/early August we would see the broken November trend as a cap for the SPX, which means a rebound/rally into August is more a selling opportunity instead of chasing the market higher. All this implies that our whole corrective bear scenario for the US market is shifting forward. Tactically, we expect a classic oversold bounce from a first half July low into late July/early August before starting a second correction wave. Although the SPX has topped out earlier than favored, late September/early October remains our favored timing for an important medium-term bottom as the basis for at least a strong Q4 countertrend rally if not even the start of a new bull cycle. Our early October target for the SPX is at 1450 and a break of this level would call for 1380/1350 as a worst case scenario. Chart 1. ) S&P-500 Daily Chart Chart 2. ) MSCI World Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 2

US Equity Market Update: Chart 3. ) S&P-500 Weekly Chart A fresh weekly sell signal in place suggests that the US market has posted a more important top, so even if we were to see another positive surprise in the SPX into later July and/or early August, we would see this as part of our primarily favored distributive top pattern; and in this case we would still say that any strength is more a selling opportunity instead of chasing the market higher. Furthermore, a re-break below 1576 would also negate the breakout above the 2007 all time high, which would even intensify the technical damage and the negative implication for the next few weeks. Chart 4. ) S&P-500 Daily Chart with SPYDER Volume Chart 5. ) S&P-500 Daily Chart with 50-Day NYSE ARMS Index Last week we had two 90% down volume events, the CBOE Put/Call ratio is heading higher and last week we saw a first spike in SPYDER volume as a mirror for increasing hedging activity and nervousness. All this suggests that we have already seen some sort of capitulation. However, tactically we still do not have the classic divergence in the SPYDER volume, which is usually the set up for a bounce/rally, and if we look at the 50-Day NYSE Arms index as a medium-term volume related market breadth indicator we are still far away from indicating a tradable medium-term bottom. On the contrary, after forming a big negative divergence (similar to 2007 and 2011) in this indicator on pretty low readings, and given the whole setup on the inter-market side, we see the US market having completed a bull market top as the basis for a bigger correction into final late Q3/early Q4. Sell any rally into later July!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 3

US Equity Market Update: False Breakouts And Classic Tops As a Bear Threat!! In our recent comments we highlighted the increasing selectivity in the US market as one reason why into a June top we wouldn t expect to see any further positive surprise in the SPX. Most defensive sectors (interest rate sensitive), transport and housing as our key short call have already topped out, whereas in broker stocks, technology, energy and the Russell- 2000 we still saw room for a final top to complete a wave 5 sequence as the basis for a bigger bearish reversal and shorting opportunity. Whereas the energy complex clearly failed to mark new highs and the XOI has broken its key support we saw marginal new highs in semiconductors, XBD and the Russell. However, all these sectors have in common that the last breakout has produced a classic false break, which is usually a high conviction set up for a bear move and subsequent overshooting on the downside. The bull flag breakout in the Nasdaq Composite has produced a classic false break and with the subsequent break of the highlighted 3378 key support the market is now testing its next big support level at 3300. A break of this level would be further bearish and call for 3250 to worst case 3170 and with the big bearish reversal in semiconductors we see the SOX and technology vulnerable for more downside. The set up in transport remains bearish. After the pull back to the broken bull trend as a bear set up the key sector is on track of reaching our first correction target at 5878, which we would see as the basis for a rebound into later July/early August. Structurally the picture remains bearish and together with housing we see transport still as our key short call in this bear cycle. Chart 6. ) Nasdaq Composite Daily Chart Chart 8. ) Russell-2000 Daily Chart Chart 7. ) SOX Index Daily Chart Chart 9. ) Dow Jones Transport Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 4

US Equity Market Update: Chart 10. ) S&P Materials Daily Chart With the break of key support levels in healthcare and materials we have another two key sectors that have completed important price tops. Apart from short-term bounces we expect more downside into later Q3 and in this context we would use strength to sell, although from a relative perspective we would clearly favour to hold healthcare over materials. Chart 11. ) DRG Daily Chart Chart 12. ) Dow Jones Utilities Daily Chart Although we saw another extension on the downside we see utilities trading in a classic wave 5 set up, which should complete the bear cycle from its April top. With a bullish divergence in our momentum work we expect utilities to be very near of starting a bigger bounce, which from a cross asset class perspective should be pretty much linked to our expectation of a near-term bottom in US bonds!! Buy utilities into further weakness. We expect a significant bounce into early August!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 5

Inter Market Update: Melt Down in EM s As a Set Up For a Deflation Trade?! Over the last few weeks we have been highlighting the increasing deflationary flavor in financial markets. With inflation expectations and the Emerging Markets in free fall and following the pre 1997 Asian Crisis pattern, equities/commodities under pressure, and a big reversal in the US dollar we have almost all ingredients for a deflationary bear cycle. What is still missing to complete a classic deflationary trade is a bullish reversal in the bond market. Following our Q2 bear scenario for bonds the US T Bond has met our 2.40% to 2.50% target and from a cyclical aspect the T-Bond is on track to moving into our projected summer bottom, which we see as the basis for a big and longer lasting corrective rebound into late Q3. So tactically, the next bigger move in yields we expect to see on the downside instead of expecting more overshooting, which from a cross asset class perspective would have significant consequences. Conclusion: After the sell off in bonds was the trigger for the current risk off trade we expect over the next few weeks a return to classic correlations and see the current yield level in the US and Germany as a safe haven buying opportunity to hide for a second correction wave in equities into later Q3. Again, despite the chance to see a significant bounce in later July, from a pattern set up Emerging Markets are in the same context as prior to the 1997 Asian Crisis. The current bear cycle in EM s is impulsive, which is structurally bearish, and we continue to think that the real problem in EM s is pure positioning, and in this context we do not think that we have already seen the ultimate capitulation in EM bonds let alone that we expect EM currencies to remain vulnerable for another big down move into later Q3/early Q4. Given all this we continue to see further negative surprises in EM s into finally late Q3/early Q4. From a macro perspective this is highly deflationary and if so then the trade from a later July top will be to buy US bonds, German Bunds, the US dollar and/or stay in cash. From a relative perspective we expect defensive sectors to outperform and with a projected summer bottom in bonds it is also time to buy back bond proxies (without EM exposure) at least from a relative perspective. On the currency side we have in the US dollar with last week s bullish reversal a new pivotal support in place. From a cyclical perspective we actually favoured to get this low in early July but given the impulsive momentum we tend to say that our anticipated summer bottom in the US dollar is in place, which is very important. From a pure cyclical perspective, the DXY is now trading between two medium-term inflection points with the May top at 84.50 and last week s low at 80.50. Between these levels the US dollar is factually in neutral position, whereas a break of one of these levels would be the trigger for a big multi month dollar move. Given our macro scenario and looking at our cycles we favour a short-term pull back into July as the basis for a new tactical bull leg and a test of the pivotal May top at 84.50 A break of this level would be very dollar bullish and imply an immediate target towards 89 into later Q4. Buy the US dollar into a July set back!! Chart 13. ) USDJPY versus MSCI Emerging Markets Chart 14. ) US Trade Weighted Dollar (DXY) Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 6

Inter Market Update: Chart 15. ) US 10-Year Treasury Yield Weekly Chart Chart 16. ) US T-Bond Daily Chart Basing Process In Bonds!! It was one of our Q2 tactical key calls to expect a significant litmus test in the bond market (higher yield) into summer. From a cross asset class perspective we said that initially a breakout in yields would be perceived as bullish for risk by anticipating a back to normality/bullish growth move but with overshooting we expected the higher yields very soon to start biting equities and in particularly interest rate sensitive themes. With last week s overshoot the US T Bond has met our 2.40% to 2.50% yield target. From a cyclical aspect the T-Bond is on track to moving into our projected summer bottom, which we see as the basis for a big and longer lasting corrective rebound into initially late Q3 followed by another litmus test on the down side before moving higher into a major Q1 2014 top. Tactically we expected the US T-Bond to move into a July bottom, which means probably we are still a bit too early and only at the beginning of a basing process. However, our key message is that tactically, we expect the next bigger move in yields on the downside instead of expecting more overshooting. In our weekly trend work on the US 10-Year yield we have a bigger non confirmation forming and in our daily trend work we have in both the T-Bond and the German Bund also a bigger non confirmation forming. Conclusion: Even if we were to see a final overshoot on the future side, aggressive traders we recommend watching out for the next bigger bullish daily reversal candle to start buying bonds! Chart 17. ) German Bund Future Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 7

Inter Market Update: Gold Testing Its Next Long-Term Support. We have been arguing gold would be in a basing process and due for a bounce into July before seeing the next litmus test into later Q3. Tactically/trading wise we have obviously been wrong, whereas the underlying structural problem with a melt down in inflation expectations and rising real interest rates we have highlighted as a threat for gold. Following the deflationary macro picture, gold has broken its pivotal April bottom last week and sold off to its next major long-term support area at $1300 to 1275. The latter represents the 38% retracement of the 2000/2011 bull cycle and is a key level that should be better defended if not to open a next down window towards $1100. Generally, gold is oversold on all time frames and on a weekly basis it is record high oversold!! According to the COT data we have today a lower speculative long positioning as to the start of the whole secular bull market in 2000 and our sentiment studies have moved into contrarian territory. Together with a big divergence versus a lower high in the CBOE gold volatility all this alone would suggest gold to be near of an important tactical bottom if not even a major bottom but the key argument is probably the seasonal factor of gold. In June/July gold is usually moving into its season bottom and apart from the deflationary melt down year 2008 we have seen in all years since the 2000 secular low a major tactical gold bottom in the June/July time frame!! Together with the bond market moving into a low (suggesting real interest rates to move lower from hear) we see gold near to an important low as the basis for a rebound into initially August and at the end of the day this rebound should just be the beginning of a corrective/volatile and longer lasting rebound into finally H1 2014. A break above $1305 would be initially bullish and call for a rebound towards 1330/1350, whereas a break of 1270 would be still bearish and imply more downside towards 1250 and 1210 as next minor support levels. Chart 18. ) Gold Daily Chart Chart 18. ) Gold Seasonal Chart Chart 19. ) Gold Weekly Chart Chart 19. ) Gold versus CBOE Gold Volatility NOT FOR DISTRIBUTION INTO THE U.S. UBS 8

Asian Corner Update: China In Free Fall And Bearish Biased Into Early Q4!! In our last update on China (May 22 nd weekly comment) we have been looking for a second corrective rebound wave into deeper summer before starting the next bear cycle in the Shanghai Composite into initially late Q3. However, given the underlying weakness of Emerging Markets we said that this scenario would be only valid as long as the SSEC would not break its pivotal April/May bottom as a key support and tactical short trigger. After the failed May rally and the subsequent break of its April/May double bottom at 2161 the Shanghai Composite/China is in free fall and with today s key reversal the SSEC has successfully defended its December low at 1950. Near-term the market is of course oversold and could bounce. However, given the impulsive structure of the current bear cycle we see China in the same bear cycle as the Western markets, which suggests that after a significant rebound (corrective wave 4) from a first half July low into early August we expect more downside (a final wave 5) into late Q3/early Q4, which is our time projection for the next larger bottom as the basis for a new bull cycle. A break of 1950 in the SSEC would make a retest of the 2008 panic low at 1670 very likely. In this context we can say that for aggressive traders a bounce into early August is probably a playable trade but form an investment perspective we do not expect a real and tradable bottom before early Q4. Sell into rallies! Chart 20. ) Shanghai Composite Daily Chart Chart 21. ) Shanghai Composite Weekly Chart Chart 22. ) Hang Seng China Enterprise Index Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 9

European Equity Market Update: Oversold But More Downside Into Early July Tracking the ongoing underperformance versus the US market the June rebound in Europe was more or less non-existent, which was the setup for another big sell-off and further increasing technical damage. More or less all EU headline indices have broken their 200-day moving average, which is structurally bearish. The OMX and SMI have broken their 2011 and 2012 bull trends, whereas the DAX, AEX, and the STOXX-600 are testing these pivotal trends this week. On a short-term basis we could see an oversold bounce but looking at our cycles we expect to see more weakness into early July before seeing a more significant bounce into late July/early August. Chart 23. ) Euro Stoxx 50 Daily Chart Euro Stoxx 50: Last week s bounce remained subdued and the next down leg violated the mid-june low and the 200-day moving average. A subsequent break of the crucial April low shifts this week s focus at the mid-point of the entire June 2012-May 2013 advance at 2450. Despite the bearish implication of a lower low in place, we have to bear in mind that the short-term situation is increasingly oversold. As a potential starting point for stabilization and a limited oversold bounce, the focus is on 2450 as the next technical level on the downside. Potential strength should be seen as a tactical and limited bounce within the current correction phase, which we expect to develop into deeper Q3. Chart 24. ) STOXX Europe Small Caps Daily Chart STOXX Europe Small Caps: Despite a higher high into late May, the small cap camp has seen a sharp and significant reversal. Short-term trends and the major trend off from the November 2011 low have given way and the break of the horizontal key support at 185 has cemented a major top formation! This is another confirmation for our view that European equities have topped out. Tactical trading supports are at 176 and 169, but given the magnitude of the top in terms of time and price, it is obvious that these levels will provide just temporary support on the way down. Any bounces are opportunities to sell. NOT FOR DISTRIBUTION INTO THE U.S. UBS 10

European Equity Market Update: Chart 25. ) FTSE-100 Daily Chart FTSE-100: The big level at 6200 has triggered just a small bounce. With last week s bearish close, the important April low has given way, which after the significant June reversal, is the next bearish technical development. For this week, a minor support is at around 5930 and the August trend is coming in shy below that area. Due to the oversold tactical picture, the June trend should avoid another bearish acceleration for the time being. Even if we see a bounce campaign off from the trend support, we expect lower highs to develop into deeper July followed by further correction themes into deeper Q3. Chart 26. ) DAX-30 Daily Chart Chart 27. ) Swiss Market Index Daily Chart DAX-30: The DAX has broken its key support at 8075 earlier than expected, but thanks to the recent outperformance the index is still well above its April low. For this week, the focus is on the 200-day moving average at 7684 and the September 2011 trend at 7655 as the next potential support. A successful test and reversal would offer the chance for a bounce attempt this week, whereas a break of 7655 would call for an immediate test of the April low at 7418. Due to the oversold market breadth and momentum indicators, an attempt to stabilize above the April low is the favored short-term scenario and thus the tactical focus should be on the September 2011 trend support. First resistance is now expected to develop at 8000/8075. Swiss Market Index: After a weak bounce, last week the index broke its June 2012 trend line and the key support at 7500, which finally completed a classic top formation in the SMI. Tactical supports for this week are defined by the 200-day moving average at 7265 and the mid-point of the June 2012-May 2013 advance at 7067. Our next medium-term price target is offered by the price projection of the top formation at 6750. Potential countertrend rallies should furthermore find resistance below the broken trend line at 7500/7640. NOT FOR DISTRIBUTION INTO THE U.S. UBS 11

STOXX Europe 600 Index Sector Overview: NOT FOR DISTRIBUTION INTO THE U.S. UBS 12

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Weekly Technical Indicators: (Source: Pinnacle Data, Datastream) Charts: Metastock NOT FOR DISTRIBUTION INTO THE U.S. UBS 14

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