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UBS
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Equities Sales Trading Commentary
Technical Analysis
Weekly Comment
Global
 
Michael Riesner Marc Müller 27/07/2010
michael.riesner@ubs.com marc.mueller@ubs.com+41-44-239 1676 +41-44-239 1789
 
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Bounce in the US is Extending … Watch Japan!!
 
US Trading
: The break of the July 13 high at 1100 is important from a cyclical standpoint as it opens the door toward more upside into later this week/early next week. From a pure price point of view most headline indicesare on the way to re-testing their July 26 high, which is the level of 1131 in the SPX.
 
Does last week’s break of 1100 change our medium-term bear case? The answer is no. Although the July bounceis lasting longer and moving higher than favored, it leaves our medium-term cyclical roadmap unchanged. Our cyclical models are still pointing to an important low in the VIX index in late July/early August, which impliesthat risk assets are about to move into an important tactical top in the next 5 to 10 trading sessions. Looking at themarket internals, the July bounce is corrective, so all in all we are talking about the last 2% to 4% on the upside.Translated, this means that we would not chase the market at current levels, although on the other hand it stillseems too early to sell. Last week’s breakout level at 1100 has changed into an important support.
 
US Strategy:
Our long-term view is unchanged. As part of our 2010 strategy, and following the 4-year  presidential cycle, we called a major top in equities in April. On the back of our cyclical roadmap we anticipateda complex and volatile correction that should ultimately last into late Q3/early Q4, before resuming the cyclical bull market started in 2009. Our final SPX target is unchanged between 1000 and 944, which suggests the risk of another 15% correction leg over the next 10 weeks. We continue to see rallies as an opportunity to sell.
 
European Trading
: With the banking sector gaining momentum the European headline indices are extending thecurrent rally. However, in the bigger picture the markets are trading in corrective sideways trading ranges andgiven the increasing overbought situation on the daily basis we don’t expect a sustainable breakout campaign onthe upside. We would not chase the markets to the upside as we continue to see equities moving into an importanttactical top in the next 2 weeks.
 
Asian Corner:
The Nikkei Index is re-testing its November 09 relative low versus the MSCI World. On a short-term basis Japan still has the chance to bounce somewhat, but on the back of the inter-market correlation versusthe USD/YEN we expect Japan to provide a negative surprise in Q3/Q4. On the currency side we see theUSD/YEN heading towards its 1995 low at 80 over the next few weeks. If so, it will be the mirror for another spike in risk aversion in financial markets. Buy volatility and sell/short Japan into any strength.
With a fresh weekly MACDshort signal in the USD/YEN,we expect an imminent test andfinally also a break of the November low at 85, whichwould suggest that, in the big picture, a serious test of the1995 low at 80 is underway.The threat of a break of 80 inthe USD/YEN is very likely to be accompanied by renewedvolatility in the financialmarkets. The time window for all this will be later Q3 and Q4.
 
 
Weekly Comment
 . UBS
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US Equity Market Update:
Don’t Chase the Market
Last week’s pull-back was only short lived, and after stabilizing above our short trigger of 1042 the marketreversed and broke to a new reaction high. From acyclical perspective the break of the June 13 high at 1100was important, as it opens the door to more upside intolater this week if not even into early next week.The risk of moving above 1100 is something that we have been aware of, although it was not our preferred scenario.Keep in mind that in our primary June bounce scenariowe said that we expect a rebound lasting several weeksinto deeper July/early August before the next major tactical down-leg should start. Although in early July wesaid that we expect the market to bounce into the earningsseason, after the temporary break of 1042 we didn’texpect this kind of strong rebound. The question iswhether the break of 1100 generally changes our medium-term bear case? The answer is no.
The July bounce lasts longer and goes higher thanfavored, but this leaves our medium-term cyclicalroadmap unchanged. Our cyclical models are stillpointing to an important low in the VIX index in lateJuly/early August (chart 4/5), which implies that risk assets are about to move into an important tactical topin the next 5 to 10 trading sessions.
Looking at the low volumes and the shape of the wholerebound pattern, we see the current move as part of aclassic corrective countertrend rally. If so, then the SPX iscurrently trading on the final wave c (chart 1) of the pattern, so the move will be limited in time and price.Furthermore, our medium-term oriented momentumindicators such as the NYSE McClellan Oscillator areapproaching overbought extremes. However, in order toreceive confirmation that an important top is in place weusually see a non-confirmation, but – since thisdivergence is still missing – it is realistic to expect more but limited upside.
Conclusion:
The break above 1100 in the SPX offersmore upside near-term, but if we put everything together we are talking about the last 2% to 4% of the current bounce, which means that we would not chase the marketat current levels, although on the other hand it still seemstoo early to sell. Last week’s breakout level at 1100 haschanged into support for aggressive traders. On the upsidea test of the June 26 high at 1131 is realistic. Our medium-term view is unchanged. Anticipating another strong tactical down-leg below 1000 in the SPX, we aresticking to our recent comments and would use any kindof strength in July to sell.
Chart 1. ) S&P-500 Daily ChartChart 2. ) S&P-500 Daily Chart with NYSE McClellan IndexChart 3. ) S&P-500 Weekly Chart
 
 
Weekly Comment
 . UBS
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US Equity Market Update:
Our view on the markets' volatility is unchanged. Our cyclical models are still pointing to an important low in theVIX index in late July/early August, which implies that risk assets are about to move into an important tactical top in thenext 5 to 10 trading sessions.Currently the VIX index is re-testing its strong support at23/22.80. A break below 22.80 would call for a temporaryovershooting toward 20/19, whereas a daily break above26.25 would put a short-term bottom in the VIX index.Keep in mind that from seasonal standpoint (chart 5.) weusually see an important bottom in volatility in July andrising volatility into Q4. This year we more or less expectthe same kind of roadmap. Into late September/earlyOctober our minimum target is a re-test of the early Julyhigh at 57.60, so buy a break above 26.25.
Sell Housing into Strength
The US banking sector remains weak relative to the benchmark. After last week’s sell-off the BKX is oversold,and with daily momentum indicators stabilizing we canexpect a bounce this week. However, between the levels of 51 to 45 the BKX is in a pretty neutral position, whichmeans that as long as we do not see a break on either of these levels we see no reason to act.The US housing sector is bouncing strongly, but the shapeof the rally looks corrective as the whole pattern seems to bedeveloping in a classic a-b-c shape. Conclusion: the currentrally will be limited in price and time, so we would watchout for a key reversal between 105 and 110 to sell and/or short this high beta sector. We expect new lows into deeper September/early October, so we are anticipating another significant correction in housing stocks over the next 10weeks.
Chart 4. ) S&P-500 Daily Chart with VIX IndexChart 5. ) Seasonal Pattern VIX Index (1990 – 2009)
Seasonal Pattern Volatility (VIX)(1990-2009)
-10%-5%0%5%10%15%20%25%Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Chart 6. ) BKX Daily ChartChart 7. ) HGX daily Chart
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