h Technical Analysis Weekly Comment Equities Sales Trading Commentary Global Michael Riesner Marc Müller 12/03/2013 michael.riesner@ubs.com marc.mueller@ubs.com +41-44-239 1676 +41-44-239 1789 Wave 5 in SPX Underway Don t Chase USDJPY! US Trading: We have been looking for a minor pullback in the SPX into second half February, and after identifying the February 26 th low at 1485 as our anticipated trading low, the market is right on schedule for moving higher into later Q1, which was and still is our favored timing for the first important tactical market top in 2013! A growing number of divergences in our indicator work is confirmation that from an Elliott wave perspective the major headline indices/key sectors are trading in a wave 5 of a larger degree, which is just one reason why we don t see last week s new all-time high in the DJI as a sustainable breakout. Into expiration we usually see the underlying trend continuing, so the most likely timing for a major cycle peak in the SPX remains our favored later March timeframe. After the break of 1530, the SPX is on the way towards our next target zone at 1560/1570, which after turning bullish in late July last year, was always our preferred timing for a late Q1 top. Support is at the last breakout level at 1530, and key support is unchanged at 1485. Given the overall market set-up, we see further strength into late March more as an opportunity to sell or position defensively instead of chasing the market/risk higher. US Strategy: Our medium-term view remains unchanged to what we gave out as a cyclical roadmap in our 2013 strategy report. Tactically, we continue to see the SPX moving into a late Q1 top followed by a first significant (5% to 7%) correction into deeper Q2, which would be in our view just the beginning of a bigger distributive process into summer. In this context we still expect the start of another significant rally from a deeper Q2 trading bottom into the July/August timeframe, which remains our favored target for a major market peak and the start of a significant bear cycle into Q3/Q4! European Trading: After posting our favored late February cycle low, Europe is bouncing and from a timing perspective we continue to see the bounce moving higher into a major tactical top in later March. Given the increasing selectivity, the underperforming Periphery, the Euro Stoxx and the AEX are on the way to re-testing their January highs. The outperformer markets (FTSE, SMI, DAX, OMX and CAC) have all hit new-year highs albeit based on lower momentum, which produces divergences in our indicator work and which we see as an early warning indicator for a more significant tactical setback into deeper Q2. On the sector basis, cyclicals are losing momentum versus defensives, which is currently more a reflection of the recent outperformance in the dividend hype themes (healthcare, food, personal) and the losing momentum in banks instead of outright underperformance of cyclicals. In general, we see the current weakness in banks as confirmation of our 2013 base case scenario that financials, as early cyclicals, are topping out earlier than other sectors. Inter Market Analysis: Although we saw a pick up in inflation expectations last week the bounce in the AUD, copper, oil and/or the EUR was so far rather weak. Given this underperforming pattern the current risk on regime remains on a fragile basis and even if we were to see more bouncing into later March, the time window for the current risk on regime is getting tighter, which suggests a negative surprise in economic sensitive commodities into deeper Q2 before we get a more important tactical buying opportunity into summer. Asian Corner: It was one of our 2013 key calls that after its structural sell signal last year the JPY could move into an important tactical bottom in late Q1. After the corrective wave 4 minor set back into later February and following the correlation to risk, the USDJPY is currently trading in a wave 5, which we continue to see moving into an important tactical top in later March. Into Q2 we expect a significant bounce in the JPY, which in our cyclical model could be just the beginning of a longer lasting corrective set back in the USDJPY into Q4 before a new underlying bull leg starts. In this context we see the risk of a larger corrective setback starting in the Nikkei- 225 from a later March top into initially deeper Q2. Don t chase Japan!! 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 Daily Chart with Stock Trading Above 20-Day MAV. Chart 3. ) S&P-500 versus ISHR IBOX High Yield Growing Divergences!! In our last weekly comment we identified the February 26 th reaction at 1485 as our anticipated late February trading low. In this context we said that as long as the SPX trades above this level the market would be bullish biased into later March, which was and still is our favored timing for the first important tactical top of the US market in 2013. Do we have evidence that the market is moving into a more important top in March? Inline with our last week s call we still think that from a pure Elliot wave perspective the new up-move in most headline indices and key sectors (chart 4./5.) represents a classic wave 5 of a larger degree, which at the end of the day should complete the November bull cycle in the SPX. Methodically and intellectually, a wave 5 is accompanied by losing momentum, which usually produces divergences and non-confirmations in more or less all technical indicators (very often including sentiment studies). Against last week s new breakout in the SPX we see the number of NYSE new highs contracting, we have classic divergences forming in our daily and weekly price indicators and on the breadth side the number of stocks that are trading above their relevant 20-day or 200-day moving average is also not confirming the new high in the SPX. Last but not least the divergences on the inter-market side are also still intact or increasing. Economic sensitive commodities are not confirming the bullish momentum in US equities, and there is a growing divergence between the SPX and high yield bonds, where we see the Ishare High Yield ETF still forming the right shoulder of a potential H&S formation against the SPX hitting a new reaction high. Keep in mind, last March/April we had a very similar scenario, where a big divergence between both markets has been a leading indicator for the Q2 correction. Conclusion: Into expiration we usually see the underlying market trend continuing, so the most likely timing for a major cycle peak in the SPX remains our favored later March timeframe. After the break of 1530, the SPX is on the way towards our next target zone at 1560/1570, which after turning bullish last late July, was always our preferred timing for a late Q1 top. Support is the last breakout level at 1530 and key support is unchanged at 1485. Given the overall market setup we see further strength into late March more as an opportunity to sell or to position defensively instead of chasing the market/risk higher. NOT FOR DISTRIBUTION INTO THE U.S. UBS 2
US Equity Market Update: Chart 4. ) Dow Jones Industrials Daily Chart Chart 5. ).. Dow Jones Transport Daily Chart Wave 5 in Transport Underway!! The price structure of the bull leg from the November low in the US market has a clearly impulsive shape (extended wave 3), and since the February pullback (wave 4) was slightly milder than expected, we got the indication that a potential final wave 5 would also produce, in most headline indices and key sectors, a new breakout instead of forming a failure, which is a pattern we also had on the radar screen. With last week s new breakout, we got the ultimate confirmation that our favored wave 5 extension in the US market is underway. Our price target for the Dow Jones Industrials remains unchanged at 14540 but the most important message is that given the wave 5 character we do not see last week s break to a new all-time high as a sustainable breakout. Into April and into May we should see a re-break below 14101, in this case it is likely to see a more significant setback/profit taking, which would lead to a pullback to 13600. Chart 6. ) Dow Jones Transport Weekly Chart We have the same pattern in other key sectors such as transport. Last week s move to a new all-time high in the DJT represents a low momentum breakout, and in this context we are getting a bearish non-confirmation in our indicator work that suggests a wave 5 of a larger degree is underway. This is important, as on the upper timeframe transport is also significantly overbought and the key sector has reached a level that in the past was associated to important tops or at least the beginning of a distributive top building process. Conclusion: Best case is to see only a tactical setback in DJT into deeper Q2, followed by another rally and hitting new highs into summer. However, in this case it is very likely that we would see a bigger divergence forming on the weekly timeframe and this would bring us the ultimate confirmation that 1) transport is heading into an important long-term top in summer and 2) there is the risk of a significant bear cycle starting in Q3 in transport and therefore in the overall market; this would be fully in line with our 2013 strategy! NOT FOR DISTRIBUTION INTO THE U.S. UBS 3
US Equity Market Update: Chart 7. ) XBD Daily Chart Chart 8. ) BKX Daily Chart Don t Chase Financials!! With hitting a new reaction high in broker stocks and banks, the underlying trend picture in financials remains intact. However, from a wave perspective we also see in financials the current moves as a final wave 5 of a larger degree and relative to the market banks and broker stocks are losing momentum, which fits to one of our tactical key calls for 2013. In the long-term picture we continue to think that last year we saw THE long-term low in the XBD. Nonetheless, at the beginning of the year we highlighted the seasonal phenomena of financials very often moving into a more important tactical top in later Q1/early Q2. With the current divergence forming in our daily trend work we have growing evidence that banks - as an early cyclical sector - are heading into an important tactical top. In this context we would use further strength into next week to sell and/or take profits instead of chasing financials. What do we think of financials long-term? If we are correct, and banks as early cyclicals are starting to underperform earlier than late cyclicals such as commodity themes, it would be more than likely that the BKX will not mark a new reaction high into summer, which from a pattern standpoint would imply that we could see a rather boring corrective trading range developing in the BKX for the rest of 2013. Chart 9. ) BKX Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 4
Equity Strategy: All-time Highs and Big Numbers The Bulls Are Back!! In our tactical roadmap for 2013 we expected equities moving into an important late Q1 peak followed by a distributive top building phase into summer before seeing a significant bear cycle starting into Q4 and into Q1, 2014. Sentiment-wise we expected topics such as the re-pricing of growth and there is no alternative but equities versus the low yields to get consensual themes. We ve furthermore highlighted the fact that the DJI, the SPX and the German DAX are not far from big price levels and that given our bullish bias for Q1, a break of the all-time highs in the Dow and the DAX would be very likely. In our 2013 strategy we argued that given that the high basis equities are starting into 2013, we would expect a break of such big levels to act as a trigger for the ultimate sentiment overshoot into contrarian territory. Generally, in the field of sentiment analysis we see SENTIX as one of the most comprehensive and profound sentiment polls worldwide. Last week the DAX hit the round number of 8000, and after the late February sentiment washout the short-term trading bias in the SENTIX flipped back to contrarian levels. In this context it is interesting to see that on the other hand the strategic 6-month bias for the German market has started to deteriorate, which is similar to last years late Q1 set up. This setup has to be seen as a first warning signal, and it implies that the air on the upside in Germany is getting thin, which speaks against a sustainable and successful break of the 8151 all-time high. In the US last week we saw only a marginal gain in the AAII Bullish Consensus. However, after the significant break of the DJI all-time high we expect a more significant rise in optimism this week and if so, we see our anticipated sentiment divergence ion the US forming, which is a phenomenon we see very often at important market peaks. Together with a big divergence forming in the 50-Day NYSE ARMS index, we continue to see the strategic technical data setup for equities getting more and more toppish!! Chart 10. ) S&P-500 Weekly Chart with AAII Bullish Consensus Chart 12. ) DAX with SENTIX 1-Week Trading Bias Chart 11. ) S&P-500 Daily Chart with 50-Day NYSE ARMS Index Chart 13. ) DAX with SENTIX 6-Month Strategic Bias NOT FOR DISTRIBUTION INTO THE U.S. UBS 5
Inter-Market Update: So Far Only Weak Rebound in Oil and Copper Despite the new rally leg in US equities and the US inflation expectations bouncing, so far we saw just a low momentum reaction in risk indicators such as the AUD, copper and oil. The consequence is unchanged to what we have highlighted over the last few weeks. The selectivity in the financial markets remains high, and given the weak patterns in economic sensitive commodities the current risk on rally remains on a fragile basis, which sooner or later will take its toll. Even if we were to see more near-term bouncing into later March, the time window for the current risk on regime is getting tighter, so if we do not see any kind of improving momentum it is increasingly likely to see a negative surprise in economic sensitive commodities into deeper Q2 before we expect a more important tactical rally starting into summer as a late cyclical outperformance phenomena. Basing Process in Gold In the precious metals area we continue to see gold and silver trading in a tactical basing process. In gold the sentiment has cooled down to pessimistic levels last seen in May. We have seen a significant washout in speculative positioning and in the gold mining sector we had record-selling volume, which implies that the precious metals are in a contrarian situation. Last but not least, it seems that with the Friday intraday reversal gold is showing some relative strength versus the recent correlation where economic good news out of the US was ultimately linked to a new sell-off in gold as this anticipates a sooner than expected end of the Chart 14. ) AUD Daily Chart FED quant easing strategy. Conclusion: Although we can not rule out a final overshot towards $1550 we continue to see the next bigger move in the yellow metal on the upside towards initially $1650 to 1660. Medium-term, we think that during the summer we still have to take into account another and potentially final bottom building test before we expect with the headwind for risk assets in H2, the bullish momentum ultimately coming back into precious metals as a safe haven. Keep an eye on the gold bugs index!! With the MACD model turning bullish on extreme oversold levels we have a rather good indication for a more important tactical bottom forming. Buy/add gold mines into weakness!! Chart 15. ) Gold Daily Chart Chart 16. ) HUI Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 6
Asian Corner Update: Wave 5 In USDJPY Underway Don t Chase Japan!! In Q4 last year we expected the long-term basing process in the USDJPY to complete and the breakout above 83 should be just the beginning of a multi-year bear market in the JPY. In the bigger picture we always said that a trend change in the JPY would be also a game changer for Nikkei and with the underlying regime change we expected the JPY to be the ultimate trigger for the start of a new secular bull market in Japanese stocks. With establishing a major higher bottom versus the 2009 bottom we have de facto the minimum form of a secular trend change in place and after breaking its 2010 top at 11300 the Nikkei-225 is per definition trading in a new bull market. Tactically we said in Q4 that from a medium-term perspective the first bear leg in the JPY should move into an important tactical bottom in late Q1. In October/November last year we said that following the huge patterns we can derive relatively aggressive price targets for the USDJPY and the EURJPY and if so, we should also see a big positive surprise in the Nikkei into Q1, which should move into a systematic outperformer versus the world. In our February 2 nd weekly report we have highlighted the impulsive price structure in the USDJPY and following our minor pull back scenario we anticipated a wave 4 corrective pull back into late February (chart 19.) followed by a final bull leg into late Q1 to complete the first major bull cycle in the USDJPY. At the end of the day the February pull back started from a somewhat higher price level and after the break of 95 the USDJPY is on the way towards our next target projection at 100 to101. In the Nikkei-225 we saw no real pullback at all in the second half of February. On the contrary, with continuing to outperform aggressively, the Nikkei has even produced a running correction (see chart 20.), which is a pattern that we do not see too often in the markets and which of course was also for us a surprise. One consequence is that into our projected late Q1 top the Nikkei systematically overshoots. After breaking the 38% retracement of the 2007/2009 bear cycle at 11500 (chart 18.) the market is straight on the way towards its next major retracement level at 12650 (50% retracement), which interestingly also represents the measured move target of the huge 2011/2012 double bottom. Together with the projected upper trend resistance of the 2009 bull trend at around 13000, the overbought weekly time frame as well as the record high trend momentum ADX indictor (big contrarian signal) in the USDJPY we expect the Nikkei to form an important medium-term cycle top in the next few weeks at around 12650 to 13200. Conclusion: Tactically the USDJPY is right on plan in moving into our projected late Q1 tactical top. After the wave 4 minor set back into later February we see the pair currently trading in a wave 5, which should complete an impulsive wave 3 of a larger degree. From a cyclical perspective we expect the late Q1 cycle top in the USDJPY to be a multi-month top, which suggests a longer lasting corrective a-b-c set back scenario that could even move into Q4 back to a level of around 89 to (worst case) 87 before starting the next bigger bull leg. From a cyclical perspective we expect the USDJPY topping out in the next 3 weeks. A break of 97 would imply a final overshoot towards 100/101. Into May we expect a first significant set back towards 91, which would ideally wipe out the last bull leg (wave 5) of a lower degree. Following this scenario we see the risk of a first corrective setback starting in the Nikkei-225 from a later March top into initially deeper Q2. Apart from a potential overshot into summer we expect a larger corrective process in the Nikkei to lead into Q4 before the next bigger bull cycle could start!! Don t chase Japan!! Chart 17. ) USDJPY Weekly Chart Chart 18. ) Nikkei-225 Weekly Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 7
Asian Corner Update: Chart 19. ) USDJPY Daily Chart After the wave 4 minor set back into later February we see the USDJPY currently trading in a wave 5, which should complete an impulsive wave 3 of a larger degree. From a cyclical perspective we expect the late Q1 cycle top to be a multi-month top, which suggests a longer lasting corrective a-b-c set back scenario that could even move into Q4 back to a level of around 89 to (worst case) 87 before starting the next bigger bull leg. From a cyclical perspective we expect the USDJPY topping out in the next 3 weeks. A break of 97 would imply a final overshoot towards 100/101. Into May we expect a first significant set back towards 91, which would ideally wipe out the last bull leg (wave 5) of a lower degree Chart 20. ) Nikkei-225 Daily Chart Similar to the USDJPY and to risk assets in general we expected also in the Nikkei a minor pull back into late February before moving higher into late Q1 cycle top. With continuing to outperforming aggressively, the Nikkei has produced a running correction (prices are moving higher, whereas price indicators are moving lower), which of course was also to us a surprise. Within a potential top building process in the next 3 weeks we expect the Nikkei to target 12650 to maximum 13200 before a corrective set back into Q2 should send the market own towards 11000. Chart 21. ) Daily Chart 50 45 40 35 30 Nikkei/MSCI World In early November we have highlighted the initial relative breakout of Japan versus the World and over the last few months Japan continued to outperform aggressively in local currencies, whereas in other Asian countries we saw negative surprises relative to the world. If we really were to see a significant rebound in the JPY into Q2 we could see at least form a relative the one or other Asian market starting to outperform versus the world and versus the Nikkei! 25 20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Thomson Reuters Datastream NOT FOR DISTRIBUTION INTO THE U.S. UBS 8
European Equity Market Update: Bouncing Into Late March After posting our favored late February cycle low, Europe is bouncing and from a timing perspective we continue to see the bounce moving higher into a major tactical top in later March. Given the increasing selectivity, the underperforming Periphery, the Euro Stoxx and the AEX are on the way to re-testing their January highs. The outperformer markets (FTSE, SMI, DAX, OMX and CAC) have all hit new-year highs albeit based on lower momentum, which produces divergences in our indicator work and which we see as an early warning indicator for a more significant tactical setback into deeper Q2. On the sector basis, cyclicals are losing momentum versus defensives, which is currently more a reflection of the recent outperformance in the dividend hype themes (healthcare, food, personal) and the losing momentum in banks instead of outright underperformance of cyclicals. In general, we see the current weakness in banks as confirmation of our 2013 base case scenario that financials, as early cyclicals, are topping out earlier than other sectors. Chart 22. ) Euro Stoxx-50 Daily Chart Euro Stoxx 50: The late February trading low has been the basis for the current bounce, which we expect to extend into the second half of March. From a pure price point of view, the Euro Stoxx has so far failed to confirm the new high of the STOXX Europe 600, partly due to the recent underperformance of banks. Next resistances are defined by the last high at 2755 and the round number at 2800. Into deeper March we continue to expect a test to the upside, which could produce a marginal new reaction high. From a structural point of view, the last reaction low at 2563 remains the key support for the index. Chart 23. ) European Cyclicals versus Defensives With the STOXX Europe 600 marching to a new year high, we have seen the cyclical-defensive spread falling to the June/July outperformance trend. However, the recent underperformance of cyclicals is more a reflection of the continued strong performance of the dividend hype themes (healthcare, food, personal) and the losing momentum in banks instead of outright underperformance of cyclicals, where we still have intact outperformance trends in industrials, construction, travel and technology, whereas the relative picture of autos and chemicals is losing momentum. At the end of the day we continue to see an increasing selectivity into deeper 2013, where we see the current weakness in banks as confirmation of our 2013 base case scenario that financials, as early cyclicals, are topping out earlier than late cyclicals, where we still expect at least one outperformance move to start in commodity themes into summer. NOT FOR DISTRIBUTION INTO THE U.S. UBS 9
European Equity Market Update: Chart 24. ) FTSE 100 Daily Chart FTSE-100: Within Europe, the FTSE-100 remains in the outperformer camp and the market hit a fresh year high last week. From a price point on view, with the round number at 6500 we have a psychological resistance within striking distance, and the high from 2007 at 6755 would be another potential target for the anticipated late March top. The first significant support is unchanged at 6258. Chart 25. ) DAX-30 Daily Chart DAX-30: The most recent extension has been moderate from a momentum point of view but it fits the expectation that we are moving into our favored late March top, where the underlying trend momentum and breadth should deteriorate. From a pure price point of view, the picture remains constructive while trading above minor support at 7872. Only a re-break would generate a negative price signal. After a limited pullback early this week, a test of the psychological big figure at 8000 is on the agenda. Technically more significant is the all-time high at 8151. Key support is at 7537. Chart 26. ) Swiss Market Index Daily Chart Swiss Market Index: Last week saw quiet trading on the index front and one significant up day accounted for almost the entire weekly gain. The diverging daily MACD is a reflection of the deteriorating index momentum. Partly responsible for this development are key charts such as the large banks, which have so far failed to confirm the recent index high. With selectivity also starting to bite the Swiss market, the current trend of the SMI is moving into a maturing phase. Furthermore one should bear in mind that the current defensive index is one of the most overbought charts in Europe, and thus also vulnerable for a significant setback in Q2. A minor resistance is at 7785 and the round number at 8000 represents psychological resistance. A minor support is at 7635 and the last reaction low at 7423 defines a key support level for the SMI. NOT FOR DISTRIBUTION INTO THE U.S. UBS 10
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