NOT FOR DISTRIBUTION INTO THE U.S. UBS
1
Equities Sales Trading Commentary
Technical Analysis
Weekly Comment
Global
Michael Riesner Marc Müller 22/05/2012
michael.riesner@ubs.com marc.mueller@ubs.com+41-44-239 1676 +41-44-239 1789
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Washout in the US … Near-Term Bounce Still Likely
US Trading
: 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.
US Strategy:
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.
European Trading
: 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!!
Asian Corner:
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!!
Weekly Comment
NOT FOR DISTRIBUTION INTO THE U.S. UBS
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US Equity Market Update:
New Momentum Lows!!
With the break of major support levels in key indices(Nasdaq Composite, Russell-2000 and transport), the pressure in the market increased and we saw a sharpwashout on Thursday/Friday last week.
One consequence of last week’s sell off is that thebullish divergences we highlighted last week in ourmomentum indicators have been wiped away, whichaffects the whole structure of the market. From a waveperspective the whole correction move from the earlyMay bounce high takes an impulsive character, whichalone is a reason to expect more weakness, regardlessof any kind of short-term bounce scenarios.With last week’s break of the October bull trend in theNasdaq Composite, the structure in the US stock market has ultimately turned bearish.
Over the last fewweeks we have highlighted the deteriorating technical picture in key technology stocks given that we saw thissector as critical in a potential top-out scenario. Last butnot least it was one of a few reasons why in the end wefavored that the April/early May bounce to fail to make anew high in the SPX. Keep in mind, technology was oneof the top outperformer sectors in Q1 and one reason behind the outperformance of the US versus the MSCIWorld.
Last week’s decline in technology has animpulsive character, which suggests more downside inthis over-owned sector and if so, it will weigh on theoverall market which could cause the US market totemporarily underperform Europe.Conclusion:
Last week we said that we would expect themarket moving into a short-term low as the basis for a 1-to 2-week bounce but on the other hand we also warnedthat despite the deteriorating sentiment we still had noevidence of a real washout. Last week’s sell-off causedinitial spikes in our fear indicators (page 4.), and from amomentum perspective the sell-off had signs of a classiccapitulation. From a cyclical perspective we are still in thetimeframe of an important trading low that we would seeas the basis of a 5 to maximum 10 session bounce.However, our key message/bearish medium-term biasremains unchanged. Given the impulsive character of thewhole correction in risk assets we would see a bounce justas a corrective countertrend reaction (wave 4) on the waylower into June/July (wave 5), which remains our preferred timing for a major tactical low.
From a pricepoint of view, our June/July target SPX target at 1290has been more or less reached. We are consequentlyturning our focus on 1250, as the next major supportand worst case 1210. Strength is still a sellingopportunity.
Chart 1. ) S&P-500 Daily Chart with McClellan OscillatorChart 2. ) Nasdaq Composite Daily ChartChart 3. ) Russell-2000 Daily Chart
Weekly Comment
NOT FOR DISTRIBUTION INTO THE U.S. UBS
3
US Equity Market Update:
Major Tops Completed!!
Last weeks sell-off caused further technical damage inprominent market measures.The Russell-2000 hascompleted a major head & shoulder top formation andwith the break of 5028 the transport sector hascompleted a major double top, which is bearishstructurally.In the energy complex,
the whole sell-off from the failedbounce April/early May bounce has been developing intoan impulsive shape, which suggests that we are currentlytrading in wave 3 of an impulsive bear structure
. We seethe same in financials. In our recent comments we warnedthat a break of 47 in the BKX could trigger a trend movegiven the low readings in the ADX indicator. After the break of 44 we have the next support at 42.However,
the key message is that although we could see ashort-term bounce, and even if the bounce (for whateverreason) should surprise on the upside, it is very unlikelythat we have seen an important low in the market
.
It isvery seldom and actually only on the back of an externalshock and/or sharp sentiment shift that we see a marketstarting a new bull leg without forming divergences intechnical indicators.
This is currently not the case,which, apart from our cyclical roadmap, is the keyreason why after a short-term bounce we would expectto see renewed weakness and new lows across the board.
Last week we highlighted the constructive setup indefensive sectors versus the SPX. Last week we saw trendcontinuation breakouts versus the SPX in both healthcareand consumer staples. So apart from a short-term pullback the focus remains on defensive plays into at least June/July.
Chart 4. ) Transport Daily ChartChart 5. ) OSX Daily ChartChart 6. ) BKX Daily ChartChart 7. ) US Healthcare
Healthcare (XLV)/S&P-500
FROM 18/5/10 TO 18/5/12 DAILY
MJJASONDJFMAMJJASONDJFMAMx10-3 24.0024.5025.0025.5026.0026.5027.0027.5028.0028.50HIGH 0.0280 30/ 9/11 LOW 0.0244 11/ 2/11 LAST 0.0278Source: Thomson Datastream
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