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Equities Sales Trading Commentary
Technical Analysis
Weekly Comment
Global
Michael Riesner Marc Müller 24/07/2012
michael.riesner@ubs.com marc.mueller@ubs.com+41-44-239 1676 +41-44-239 1789
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No Bullishness but no Fear/Panic Either!!
US Trading
: With the Friday reversal the SPX failed to break its early July high at 1374, and with our daily trendwork turning short after posting a negative divergence, the market is negative-biased on a short-term basis. Aslong as the SPX trades above its pivotal support at 1325 the structure of the early June rebound remains per definition intact, but with the broader market underperforming, financials (new lows in broker stocks) and mostcyclicals remaining in a vulnerable position as well as defensive sectors rolling over, it’s just a matter of time before we see more downside.
As long as 1325 holds, the SPX theoretically still has the chance for another extension towards 1390, but giventhe increasingly vulnerable position we would use strength to sell. The ultimate short trigger remains 1325 and a break of this level would suggest that the US market has started a new bigger down leg into later Q3, with initialsupport at the early June low at 1266.
At 22% the AAII Bullish Consensus has hit its lowest level since the March 2009 low, which is actually purecontrarian territory. However, our overall sentiment work leaves an inconsistent picture and with the missingspikes in our fear indicators we think it is still way too early to be contrarian. There is definitely no bullishnessleft in the market but what we haven’t seen so far is the real fear and panic which we actually need to see togenerate a contrarian buy signal, and for this the volatility in equities and on the currency side is too low!!
US Strategy:
Our long-term view is unchanged. On track with our cyclical road map, the October rally toppedout in March and the SPX has started a new correction cycle in which the early June rebound just represents acountertrend rally. Looking at our indicator work and inter-market correlations we have no evidence that the earlyJune low at 1266 represents an important technical bottom. On the contrary, with the recent outperformer sectorsgetting increasingly toppish and cyclical themes still looking vulnerable, we continue to see the risk of a newsignificant tactical down leg into later Q3 and/or into Q4. If we do not see a big rotation from overboughtdefensives into cyclicals or financials the US market will get an index problem into fall and in this case wecontinue to anticipate an SPX below 1200 into late Q3/Q4.
European Trading
: The Friday reversal has the character of a key reversal. After completing the corrective Junerebound, the periphery and financials are again under pressure, the Euro Stoxx has broken its June uptrend, andthe outperformer markets (DAX, AEX, FTSE, OMX) have generated fresh short signals across the board.Generally, from a cyclical perspective the early June low represents for all markets an important medium-termcycle trough. With the break of the June lows, the IBEX and the FTSE MIB would be short-biased into later Q4with next target for the IBEX at 5200 and 11500 for the FTSE MIB. Sell into strength!!
Inter Market Analysis
: Following our cyclical roadmap the US dollar has hit a new reaction high and the DXYis on the way towards our next target at 85. We are getting new sell signals in commodity currencies (AUD/CAD)across the board, and economy-sensitive commodities are breaking their early June uptrends after the recentcorrective bounce. All this holds up a quite deflationary macro picture and leaves the door open for more negativesurprises in risk assets and in particularly renewed weakness in commodities into later Q3.
The EUR is oversold and could bounce short-term. However, despite trading in a steep bear trend we haven’t seenany spikes in volatility so far. It is very unlikely that this bear trend, if any bear trend, ends without the classic panic selling and spike in volatility. If so, then we will see an overshooting below the 2010 low at 1.19, whichwould call for 1.13 as the next major target!!
Weekly Comment
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US Equity Market Update:
Bearish Divergences!!
With the Friday reversal the SPX failed to break its earlyJuly reaction high at 1374. In our daily trend work we havea small bearish divergence in place and with generating afresh short signal on a daily basis the market is short-biased.
Pivotal support remains the last higher reaction low at1325 and as long as this level holds the markettheoretically still has a chance to further extend its earlyJune rebound pattern. However, our key arguments forour cautious medium-term view remain unchanged andin this context we reiterate our last week’s call andwouldn’t chase the market on the upside and/or usestrength to sell.
Last week we highlighted the
increasing divergences onthe inter-market side between the still resilient SPX andthe weak picture in Asian markets, underperformingcyclical sectors, declining inflation expectations, and theintact bull trend in the US dollar. All this finally resultsin a major divergence forming in the SPX versus theMSCI World,
which was not able to break its May 2011reaction high.
Last week we said that pressure in thefinancial system is building. If we are correct then it isvery likely that this pressure will unfold in a short andsharp correction and the most likely timeframe for thismove/event will be later Q3 and/or Q4.
From a sector perspective the US market remains in quite atricky position.
Since the early June low defensive sectorscontinued to outperform but are now stronglyoverbought, whereas most cyclicals (with the exceptionof the energy complex) and financials are still in aweak/corrective shape.We expect defensives to be in aroll over phase, which means if we do not get a majorrotation from overbought defensives into financials andcyclicals, the US market will get an index problem overthe next few weeks.
Last week broker stocks hit new lowsand the patterns in most cyclical sectors are still weak,which means so far we have no evidence for this rationale.
Conclusion:
As long as 1325 holds, the SPX theoreticallystill has the chance for another extension towards 1390, butgiven the increasingly vulnerable position of the broader market (Russell-2000 has broken its June uptrend at 780)and an unchanged negative picture in cyclicals we woulduse strength to sell.
A break of 1325 in the SPX wouldsuggest that the US market has started a new biggerdown leg into later Q3 and/or into Q4, which remainsour preferred timing for the next major tactical buyingopportunity. From a price perspective we continue to seethe risk of a correction below 1200 into Q4.
Chart 1. ) S&P-500 Daily ChartChart 2. ) S&P-500 versus MSCI World ($)Chart 3. ) Russell-2000 Daily Chart
Weekly Comment
NOT FOR DISTRIBUTION INTO THE U.S. UBS
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US Equity Market Update:
New Lows in XBD!!
In our recent comments we highlighted the weak positionof the broker dealer index. The XBD has hit new lows inrelative terms and in absolute terms the sector has brokenits early June uptrend, which resolves a classic bear flagto the downside. As long as we don’t see a re-break above84 the sector remains short-biased and a sell into strength.From a target projection we continue to see the risk of amove won towards 76 to 74, which is the Q4 bottom.Keep an eye on the transport sector. The DJT has beenmoving sideways since early June, which has beenforming a triangle as a classic breakout pattern. The ADXindicator as a trend momentum indicator is at extreme lowlevels. With yesterday’s break of the early June uptrend at5060 we are getting a fresh tactical sell signal, targeting4848, which is the 38% retracement of the October/Marchrally leg.After hitting the lower end of its March bear trend, wehighlighted in late June/early July the OSX as a potential bounce candidate. During the last 3 weeks the sector hasoutperformed. In the meantime the OSX has broken itsMarch down trend and relative to the SPX the sector hasalso bounced strongly.On a short-term basis the OSX is getting increasinglyoverbought and with the rebound structure having just acorrective structure it is too early to call a major bottom inthe sector. However, with the strong relative bounce the bias is changing from sell the rallies into buy the dipsand/or a potential setback into later Q3, so that in thecyclical camp we would definitely favor energy over cyclicals and other commodity sectors.
Chart 4. ) Broker Dealer Index (XBD) Daily ChartChart 5. ) Dow Jones Transport Index Daily ChartChart 6. ) Oil Service (OSX) Daily Chart
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