h Technical Analysis Weekly Comment Equities Sales Trading Commentary Global Michael Riesner Marc Müller 11/06/2013 michael.riesner@ubs.com marc.mueller@ubs.com +41-44-239 1676 +41-44-239 1789 Early June Low in Place But Clouds Gathering!! US Trading: We have been looking for a short-term setback into early June before starting another bounce into deeper June as part of a beginning summer distribution. The SPX overshot our 1610 correction target but with the Friday reversal we have the ultimate confirmation that our anticipated early June trading bottom is in place, which makes the Thursday low at 1598 a new pivotal support. As long as 1598 holds the underlying trend in the SPX remains bullish, whereas a break of last week s low (tactical stop loss level for longs) would be bearish and imply that a more important price top is in place. As long as this is not the case we can expect a retest of the May high into deeper June, before we expect the next down test developing into early July. The selectivity in the US market is increasing. Our favored sectors remain financials, energy, materials, and technology where we still expect marginal new highs, whereas transport, housing, utilities, and staples have already seen their tops and the current moves are in our view just an oversold bounce and therefore an opportunity to sell. Translated into index terms this is distributive and suggests the SPX will be capped on the upside, particularly if we take into account the wave 5 character in XBD, SOX, BKX, and OSX. US Strategy: The rally into May was exhaustive but after a high momentum rally we usually first see a distributive phase with growing selectivity and volatility before a real correction/bear cycle starts. In this context we actually still think it is too early to sell or short the market on a larger scale. However, with more and more key sectors looking toppish and an increasingly vulnerable picture on the inter-market side (emerging markets and commodities) the risk is that we ll see an earlier top than our favored late July/early August projection. Regardless of the ultimate top timing, the air on the upside is getting thin and we are sticking to our base case scenario and expect a significant correction (10% to 15%) from a deeper summer top into September/early October before starting a significant rebound into Q4 as part of a bigger corrective process. European Trading: From a pure cyclical perspective, last week s Friday intraday low represents our anticipated early June trading bottom and as long as the Euro Stoxx trades above 2664, Europe is per definition in bounce mode. However, the overall technical picture in Europe is deteriorating with bigger technical damage in value sectors (compared to the US) and financials underperforming, which has the consequences that the SMI has probably already seen its year top. More importantly, last week Europe broke its 2012 relative bottom versus the US and with a major divergence in market breadth the risk is that most of Europe posts a lower high into June before we expect more weakness into early July. We would be a seller into strength!! Inter Market Analysis: Bonds remain bearish-biased and corporate bonds are correcting strongly. Initially this is still latently bearish bond proxies. However, we see bonds moving into a big summer bottom, which implies lower yields into Q3/Q4 and it also suggests another rotation back into defensives at the latest in July. Emerging markets have broken their April bottom and are underperforming dramatically. Inflation expectations are in a meltdown, commodities are weak and the patterns in EM currencies/bonds suggesting that we are just at the beginning of a big wash out in the Emerging Market complex, which is a big thing! Short-term EM s/asia and also the Nikkei are oversold and could bounce, but into Q3 we see the risk of a negative surprise in the emerging world and Asia. In line with our cyclical roadmap we see US dollar weakness, and last week the EUR broke its February down trend. Apart from any potential near-term bounce we expect further US dollar weakness/eur strength into July before starting a bigger dollar rally. So short-term we could still see a bounce/ tactical strength in commodity themes into July. However, given the current US dollar weakness, the moves on the commodity side are too weak, which is suspicious and leaves the risk of another negative surprise in commodities, when we expect the US dollar to strengthen from a July trading bottom into Q3. Given the current setup we see the risk of a rather deflationary macro setup into Q3. 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. ) Russell-2000 Daily Chart 1598 New Pivotal Support! The SPX slightly overshot the lower end (1610) of the target range of our favored early June trading low, but with the Thursday reversal and the subsequent bullish confirmation on Friday we got the ultimate confirmation that our anticipated early June trading low is in place. As highlighted last week, for our tactical trading the Thursday low at 1598 plays a very important role. Last week s reaction low represents the last significant higher low as a new reference point, and with 1598 the SPX has also successfully tested its steep November bull trend, which alone explains why last week s low is so important. Consequently, as long as 1598 holds, the underlying trend in the SPX remains bullish, whereas a break of last week s low would be bearish and imply that a more important price top is in place. After the exhaustive May rally we said that after a first pullback into early June we should see at least one more bounce/rally leg, and only if this bounce would fail we would be at risk of seeing a negative surprise short-term. So as long as the SPX trades above 1598 as a tactical stop-loss trigger for long positions, we can expect a retest of the May high into deeper June before we expect the next down test to develop into early July as part of our anticipated larger distributive top out pattern. Last week we said that with the recent correction in value sectors the picture on the sector front has changed. Although we still have bullish biased sector themes, the correction in value breaks the underlying bullish trend momentum of the market and this means the SPX will be increasingly capped on the surprise. Conclusion: Pattern-wise we still have constructive set ups in the Russell-2000, XBD, SOX, BKX, and the energy complex. However, with a potential final wave 5, these sectors are also on the way into a more important top, which we think we already have in place in utilities, transport, housing (as our key short call) and staples, which we expect only to bounce. Together with an increasingly vulnerable picture on the inter-market side (page 6.) we see the risk of moving into an earlier top than our favored late July/early August top projection. If so, than a potential deeper/later June top could already be more important than we think today. Tactically we would be a seller into strength and with a break of 1598 we would turn bearish with expecting a set back towards 1538 into first half July. NOT FOR DISTRIBUTION INTO THE U.S. UBS 2
US Equity Market Update: Chart 4. ) S&P-500 Weekly Chart with AAII Bullish Consensus The pullback into last week caused a significant cool down in investor sentiment, which is constructive and implies a bounce that should hold more than only 2 or 3 sessions. On the contrary, given the size of the sentiment cool down we can expect another one or two weeks of a rally/bounce before topping out and starting the next down test into first half July as part of a bigger distributive pattern. Chart 5. ) S&P-500 versus High Yield ETF The pressure on the inter-market side is increasing. Rising yields will sooner or later have a negative impact on equities, and the bounce in the high yield segment is so far quite weak, which suggests further pressure on high yields into deeper summer and into Q3. We see this as a bearish leading indicator for the overall market. Chart 6. ) S&P-500 Daily Chart So far our road map is unchanged although we have factors developing that could finally bring us an earlier top than our favored late July/early August projection. Our preferred cyclical roadmap remains seeing another bounce into deeper/later June before correcting into first half July. From a July low we expect to see a final bounce/rally that should complete a bigger summer distribution before starting the first significant 10% to 15% correction leg into early Q4 as a first wave of a potential corrective A-B-C correction pattern that should finally develop into Q1 2014. NOT FOR DISTRIBUTION INTO THE U.S. UBS 3
US Equity Market Update: Financials, Energy and Tech Still Bullish With the recent correction in value stocks the picture in the US sector landscape is changing from a fundamentally and broad based bullish picture into a more selective setup, which fits the beginning of a classic distribution phase that we expect to see developing into this summer. In financials and technology, the recent market setback had a rather corrective shape (wave 4) and the energy complex and materials have confirmed obvious key support levels as a classic pullback basis for a new bounce. The recent setback has produced classic bull flags in the Russell-2000, broker stocks, and the Nasdaq Composite which, as long as you do not break the last reaction low as a key support, have a bullish trend continuation character implying new highs in the broader market, financials, and technology into June. In early May (May 5 th weekly report) we highlighted the relative breakout of the Nasdaq versus the SPX. Apart from the potential inverted head & shoulder bottom in Apple, we still have a few more bullish setups in the technology area with a breakout in Amazon, a bottom in Facebook, and a final wave 5 missing in semiconductors. Conclusion: The key message is that these sectors, which today have still a bullish setup, are in our view heading into a more important top while completing a wave 5 of a larger degree in the next 1 to 2 weeks, whereas the recent underperformer, mostly value and other bond proxies, we see just bouncing. Translated into index performance this implies that we could already see a more important top in the SPX in the next 2 weeks. Chart 7. ) Nasdaq Composite Daily Chart Chart 9. ) XOI Daily Chart Chart 8. ) XBD Daily Chart Chart 10. ) OSX Daily Chart NOT FOR DISTRIBUTION INTO THE U.S. UBS 4
US Equity Market Update: Chart 11. ) Housing (HGX) Daily Chart We see housing, transport, and the one or other value/defensive sector in a position where we already have a bigger price top in place, and in this context we would see the current bounce from last week s reaction low as a classic oversold bounce and therefore a selling opportunity before we see more correcting in these sectors. After last week s harsh/impulsive sell-off, the current bounce in housing is weak. Housing remains our key short call/trade into finally early Q4, and in this context we would use strength to sell or short this key sector. Chart 12. ) Dow Jones Utilities Daily Chart From the April/May top we saw a high momentum decline in utilities but after completing a wave 5 structure the sector is oversold and bouncing. However, after the impulsive bear cycle we see a bounce just as a corrective countertrend rally before seeing a second down leg starting. Sell any bounce!! Chart 13. ) Dow Jones Transport Daily Chart From a wave perspective we think transport has topped out after completing a wave 5 sequence into the May top and forming a major bearish divergence in our weekly momentum work. With the current bounce the DJT is pulling back to its broken November bull trend, which should cap this key sector this week. However, this would also have the implication that a bounce in the overall market could be disappointing and weak in momentum. If so, it would support the distributive character of the bounce and it would be a bearish indication for the overall market. NOT FOR DISTRIBUTION INTO THE U.S. UBS 5
Inter Market Update: Watch Emerging Markets Dark Clouds Gathering!! It was a key call of our 2013 strategy to expect a big tactical comeback in commodities and Emerging Markets before topping out in summer and starting a new bear cycle. Very early in February we ve revised our 2013 bullish base case on commodities and in our March 19 th weekly report we have highlighted the secular trend break in the relative performance of Emerging Markets versus the World. However, with the current technical set up we even see our minimum expectation of a limited tactical summer rebound in commodities/related themes and therefore also in Emerging Markets at risk as the pressure on the macro side continues to grow. In Japan we see a big correction, and the break of the steep November bull trend in the USDJPY is a tactical game-changer. Emerging markets have broken their April low and continue to underperform dramatically. Looking at the larger patterns in EM bonds and EM currencies, together with the weak commodities (despite a weak US dollar) and the continued decline in inflation expectations, we have a pattern setup on the macro side that has the potential to develop into a rather bearish picture for risk assets. Short-term emerging markets/asia and the Nikkei are oversold and could bounce, but if we do not see very soon a big U-turn on the macro side towards a more constructive setup, we see the risk in the Emerging Market complex and in Asia, the risk of a negative surprise into Q3. Over the last 2 to 3 years the world was concerned about inflation risk on the back of too much QE. Currently we see more and more clouds gathering that have the potential for a deflationary shock wave very soon!! With the recent correction the JP Morgan Emerging Market Bond Index has broken its 2011 bull trend and this break also completes a major double top. On the other hand we see the MSCI Emerging Market Currency Index (inverted) in a big basing process. From a pattern set up we think the whole complex has just finished a big corrective C wave, which suggests that after the impulsive 2011 decline, EM currencies are just at the beginning of a second impulsive bear wave!! In line with our recent call we see US dollar weakness and apart from any potential near-term bounce we expect further US dollar weakness into July before starting a bigger dollar rally. So far, commodities could not benefit from the weaker dollar which is suspicious. Short-term, we could still see a bounce in commodities and EM s but what happens with commodities if we really get a big US dollar rally from July into later Q3? From a correlation standpoint it leaves the risk of another negative surprise in commodities and with the set up in EM s and the imploding inflation expectations this paints a rather deflationary picture on the macro side into Q3. Conclusion: Short-term, EM s are oversold and with the MSCI Emerging Market testing its 2011 trend support we could see a near-term bounce. However, the underlying weakness, the increasing negative trend momentum and the patterns in EM bonds/em currencies are bearish and this implies that a bounce in Asia/Emerging Markets would just be a breather on the way down. Form a macro perspective the current set up has a rather deflationary flavor and it suggests further negative surprises in commodities and related sector themes into Q3, which negates our recent tactical bull call on materials!! It also implies that very we soon we should get a rotation back into defensives although these sectors remain vulnerable from an absolute perspective and in particularly those stocks with an EM background. One of the few safe havens we see in bonds, which we expect to move into a tactical buying set up in July!! Chart 14. ) JP Morgan Emerging Market Bond Index Chart 15. ) MSCI Emerging Market Currency Index (inverted) NOT FOR DISTRIBUTION INTO THE U.S. UBS 6
Inter Market Update: Chart 16. ) MSCI Emerging Market versus MSCI World MSCI Emerging Market versus MSCI World 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Thomson Reuters Datastream Chart 17. ) US Inflation Expectations versus S&P-500 secular trend change in EM's versus the w orld In our March 19 th weekly report we have highlighted the secular trend break in the relative outperformance spread of Emerging Markets versus the MSCI World and the generally deteriorating technical background in Asia. This was just one reason why we said that any potential rebound into summer would have just a tactical character and that further down the road this would imply more trouble. Emerging markets continue to underperform aggressively and inflation expectations are in free fall!! Short-term we can see a bounce in this aggressive move but we have the feeling that this dramatic technical set up together with the pattern in EM Bonds and EM currencies has nobody really on the radar screen. So alone from a sentiment standpoint this suggests the risk for significant portfolio adjustments and this implies that the wash out in EM s has probably just started. Over the last few months we have several times highlighted the huge divergence forming between the real world (inflation expectations) and the (QE driven) asset world. It was and still is our call that in H2 it will be very difficult if not impossible to hold up this divergence. So either we get very soon a big reversal in inflation expectations, which would then justify the trends in risk assets or risk starts to correct significantly. Chart 18. ) MSCI Emerging Market Daily Chart Last week the MSCI Emerging Market has broken its April low, which form a cyclical perspective is bearish. Short-term the index is testing its 2011 trend support and is oversold so we could see a bounce. However, given the impulsive character of the current bear move we expect more downside and finally a break of the 2011 trend into July. Sell into bounces!! NOT FOR DISTRIBUTION INTO THE U.S. UBS 7
Inter Market Update: Chart 19. ) DXY Daily Chart Chart 20. ) DJ UBS Commodity Index Daily Chart Weak USD In our May 28 th weekly report we have highlighted the overbought US dollar and with testing secular trend resistance versus the CHF and with heading into an important long-term cycle top we said we would expect a significant US dollar reversal and weakness developing into deeper summer. This call/view was just one reason why, from a cross asset class perspective, we favoured a significant rebound in commodities, Emerging Markets and also in gold. So far, commodities could not benefit from the weaker dollar which is suspicious. On the contrary, the DJ UBS Commodity index has just been trading sideways (which forms a potential negative trend continuation triangle) and relative to equities we have another failed rally, which leaves the underlying bearish picture unchanged. Shortterm, we could maybe still see a bounce in commodities and EM s but the real question is what happens with commodities if we really get a big US dollar rally from our projected July medium-term cycle bottom into later Q3? From a correlation standpoint it leaves the risk to see further negative surprises in commodities and with the set up in EM s and the imploding inflation expectations this paints a rather deflationary picture on the macro side into Q3. Chart 21. ) DJ UBS Commodity Index versus S&P-500 0.33 DJ UBS Commodity Index versus S&P-50 0 0.32 0.31 0.30 0.29 0.28 0.27 0.26 0.25 JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN Source: Thomson Reuters Datastream NOT FOR DISTRIBUTION INTO THE U.S. UBS 8
Inter Market Update: Bonds Still Bearish But Heading Into Bottom!! It was one of our Q2 tactical key calls to expect a significant litmus test in the bond market into summer, and with the break of 2.10% in the US 10-Year Treasury we saw the potential to move towards 2.40% to 2.50%. From a cross asset class perspective we said that initially a breakout in yields would be perceived as bullish risk as this would imply higher growth. However, we also said that very soon the higher yields would start biting equities and in particularly interest rate sensitive themes. Short-term, bonds remain bearish biased but from a cyclical perspective and with getting increasingly oversold we see bonds moving into a first minor trading low as part of a bigger tactical basing process into July. The key message is that with reaching our yield targets and given the forming momentum divergence in the US 10-Year Treasury chart we see bonds moving into a tactical summer bottom (yield high), which implies the start of a significant set back in yields into Q3/Q4 and finally into Q1 2014, where we have the next major long-term cycle low projection. Conclusion: Given the described picture in Emerging Markets and the latently deflationary picture we see bonds moving into a big tactical buying opportunity in the next few weeks and this also suggests that in equities it is very likely to see another rotation back into defensives at the latest in July. Keep an eye on Europe, where the recent bounce in cyclicals versus defensive has a rather corrective shape. Tactically we expect to see very soon a new relative down leg starting of cyclical themes and the break of the 2011 bottom in the European Basic Resource Sector is just one indication for more pressure on cyclical themes into Q3! Chart 22. ) 10-Year US Treasury Yield Weekly Chart Chart 24. ) German Bund Future Daily Chart Chart 23. ) US T-Bond Daily Chart Chart 25. ) European Cyclicals versus Defensives NOT FOR DISTRIBUTION INTO THE U.S. UBS 9
European Equity Market Update: Europe Breaking Its 2012 Relative Bottom vs. SPX!! From a pure cyclical perspective, last week s Friday intraday low represents our anticipated early June trading bottom and similar to the US this level represents a new pivotal support!! So as long as the Euro Stoxx trades above 2664, Europe is per definition in bounce mode. However, the overall technical picture in Europe is deteriorating with bigger technical damage in value sectors (compared to the US) and financials underperforming (top in banks in place). With this mixture we can for example say that it is very likely that the SMI has already seen its year top, whereas in the DAX we could still see a marginal break of the May high into deeper June or into later July. More importantly, last week Europe broke its 2012 relative bottom versus the US and with a major divergence in market breadth (stocks trading above its 200-day moving average is contracting and have not confirmed the May high in the Euro Stoxx) the risk is that most of Europe posts a lower high into June before we expect more weakness into early July. We would be generally a seller into strength!! Chart 26. ) Euro Stoxx 50 Daily Chart Euro Stoxx 50: Last week saw a somewhat deeper than expected pullback but with the market reaching extreme oversold momentum levels, the Euro Stoxx 50 finally managed to stage a significant reversal on Friday, which brought the expected trading low. From a price point of view, the index has retraced almost 61.8% of its April up leg, which defines now a new critical short-term support on the downside. Tactically, we expect more strength into deeper June towards minor resistance at 2755 and the next big resistance zone is at 2851/2870, whereas a break of last week s pivotal support at 2664 would be bearish and suggest more weakness into first half July!! Chart 27. ) STOXX Europe 600 vs. S&P-500 0.24 Stoxx-600 versus S&P-500 0.23 0.22 0.21 0.20 0.19 0.18 new lows Europe versus the US C A B STOXX Europe 600 vs. S&P-500: It was key call of out 2013 strategy to expect Europe to fall back into its underperformance pattern. In January we have highlighted the relative reversal of Europe and into May Europe re-tested its pivotal 2012 bottom versus the US market. This bottom has been broken last week, which is trend continuation bearish for Europe with the consequence that a bounce into deeper June could just produce a lower high, whereas the SPX could re-test its may top. 0.17 2008 2009 2010 2011 2012 2013 Source: Thomson Reuters Datastream NOT FOR DISTRIBUTION INTO THE U.S. UBS 10
European Equity Market Update: Chart 28. ) FTSE-100 Daily Chart FTSE-100: Friday s support developed a touch below our favored target zone, but the key message is that a tactical reversal is in place and the pivotal support at 6214 is not at risk in the period immediately ahead with the oversold shortterm situation. However, short-term strength into June could be limited with the late May high at 6875 not within striking distance, which means a new trend continuation signal is not likely in the period ahead. Medium-term we continue to expect the favored bounce into deeper June to remain limited as part of an early stage top building process. Chart 29. ) DAX-30 Daily Chart DAX-30: The significant support zone at 8123/8075 finally held and helped to stage a significant reversal on Friday, which should get further tailwind by a tactically oversold situation. With the auto sector forming a triangle formation above support, and industrials confirming their June 2012 up trend line, the DAX is potentially among those indices that could retest/overshoot their last high at 8557 into deeper June as part of an early stage top building process. Chart 30. ) Swiss Market Index Daily Chart Swiss Market Index: Despite a fresh weekly MACD sell signal, which represents a medium-term issue for the index, the SMI managed to hold above its June 2012 trend support, which leaves the door open for another attempt to bounce into deeper June. The main driver should come from a tactically oversold situation, whereas the broken bull trend from 2011 in the food sector and key healthcare stocks represents a cap for the overall market. Overall, with growing technical damage in food, healthcare and the personal sector as well as financials starting to underperform we think we have a very high likelihood that the SMI in particularly has already seen its year top. On the contrary; if we take into account the deteriorating picture on the Emerging Market side we could see further trouble down the road for the Swiss market, where we have few stocks with significant EM exposure!! Key support 7500. Sell into any bounce!! 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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