NOT FOR DISTRIBUTION INTO THE U.S. UBS
Equities Sales Trading Commentary
Michael Riesner Marc Müller 22/05/2012
email@example.com firstname.lastname@example.org+41-44-239 1676 +41-44-239 1789
Washout in the US … Near-Term Bounce Still Likely
: The current correction leg in the US is extending and with breaking key supports in the Russell-2000 and transport, the bearish trend momentum has been increasing. Technology was one of the outperformer sectors in Q1 and one of the reasons behind the outperformance of the US versus the MSCI World. Last week the Nasdaq broke its October bull trend and the move has an impulsive character, which suggests further downside inthis over-owned sector. If so, we could see the US temporarily underperforming Europe.
Last week we highlighted the deteriorating sentiment but said that we still had no evidence of a real washout.With initial spikes in our fear indicators, last week’s sell-off showed signs of a classic capitulation, which stillsuggests seeing a near-term bounce in 5 to a maximum of 10 sessions. However, our key message and bearishmedium-term bias remains unchanged. Given the current impulsive character we would see a near-term bounce as just a corrective countertrend reaction (wave 4) on the way lower into June/July (wave 5), which remains our preferred timing for a major tactical low. From a price point of view, our June/July target SPX target at 1290 has been more or less reached. We consequently turn our focus on 1250, as the next major support and worst case1210. Strength is still a selling opportunity.
Our long-term view is unchanged. From the early October low, we expected the SPX to start acorrective rally into late Q1/early Q2 before rolling over into a new bear cycle into the second half of 2012. Lastweek’s impulsive sell-off is the ultimate confirmation that the US has started a new corrective bear cycle intoinitially June/July before we expect a strong and longer lasting tactical bounce into late Q3/early Q4. Followingour cyclical models, a potential June/July bottom will NOT be the low for 2012. After a Q3 bounce we anticipatemore weakness into Q4 before moving into the ultimate buying opportunity for a bullish 2013 for risk assets.
: Europe is extending its losses, but in most headline indices (Euro Stoxx, DAX, CAC, AEX,IBEX) the downside momentum has been deteriorating, whereas the decline in the FTSE has been taking animpulsive character. We continue to see the chance of a near-term bounce (Euro Stoxx limited at 2300) beforemoving lower into a more important June/July tactical bottom. On a sector basis banks, basic resource, financialservice, telecoms and utilities are on the way to re-testing their September/October lows, which are key support.
Inter Market Analysis
: The correlations on the macro side over the last few weeks have been quite stable. Therecent moves in bonds, commodities, and on the currency side were impulsive and from a macro perspective thecurrent market environment has an increasingly deflationary character. On a short-term basis these trends arestretched. The German Bund has reached our target projection at 144/145 and in line with our cyclical models theEURUSD posted a reversal candle last week, which is the confirmation that our anticipated short-term tradinglow is in place. Consequently, as long as the EURUSD holds 1.2640 we have the chance to see a 5 to maximum10 session bounce, whereas a break of 1.2640 would open a new bear window in the underlying trend into at leastlate June, with the consequence of seeing renewed pressure on risk assets.
Gold and silver have successfully tested their December lows, making these levels an even more important andobvious support level. With last week’s reversal, EUR denominated gold is testing its February downtrend. A break of €1250/1260 would suggest that the yellow metal is moving back into a safe haven status, with thecorresponding negative consequences for risk assets!!
After breaking the pivotal early April low at 1005, the MSCI Emerging Market was in free-fall.On a short-term basis Emerging Markets and Asia are oversold and should bounce, but given the impulsivecharacter of the recent bear wave we continue to expect more weakness into June/July. It’s too early to buy!!