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Equities Sales Trading Commentary
Michael Riesner Marc Müller 24/07/2012
email@example.com firstname.lastname@example.org+41-44-239 1676 +41-44-239 1789
No Bullishness but no Fear/Panic Either!!
: 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!!
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.
: 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!!