Equities Sales Trading Commentary Technical Analysis …... The US dollar remains strong but as long as we don’t get a new high momentum breakout in the DXY (and as long as the AUD

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Equities Sales Trading Commentary

Technical Analysis Weekly Comment Global

Michael Riesner Marc Müller 25/11/2014 [email protected] [email protected] +41-44-239 1676 +41-44-239 1789

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SPX Overshooting Status… Europe/DAX Catching Up! • US Trading: After the aggressive rally from the mid-October trading bottom into early November, we expected a short

corrective pullback into deeper/later November before moving higher into later December. After just a few days of sideways consolidation, the SPX hit a new high driven by continued mega cap outperformance plus internal sector rotation (strong retail and commodity themes starting our anticipated next rebound leg). So although our bias into December was bullish, on the way higher we have been clearly too cautious short-term. One consequence of the continued and exhaustive overshooting is that we expect our anticipated later December top to shift into early December, which we would see as the beginning of a distributive top building process that could last into January before starting a significant correction cycle into later Q1.

• A break of 2070 would call for more overshooting towards 2095 and best case 2120/2140, whereas a break below 2040 would imply that a more important tactical top is forming. Mega caps are in an exhaustive overshooting process, our daily trend work is at overbought extremes, and the SKEW index is spiking versus the low VIX index. Although it is too early to get bearish due to seasonally, we nonetheless think that most of the year-end rally we have already seen, which limits further upside.

• US Strategy: After seeing the anticipated 10% correction leg we called an important tactical bottom in mid-October; our call was for a significant rebound into later December before starting a new and potentially sharp correction leg into later Q1. A new high in the SPX was not our favored scenario but we always said that even if we were to see another surprise (via the relevant sector rotation) this wouldn't negate our bear call for Q1. On the macro side we continue to have a number of major divergences in place (VIX, high yields, weak breadth) and together with the exhaustive overshooting we see the SPX trading in a wave 5 of a larger degree, which should complete the 2011 bull cycle. We are sticking to our cyclical roadmap and continue to see the risk of a significant correction/washout in H1 2015 before resuming the underlying bull market.

• European Trading: After a 2-week consolidation phase Europe has started its next rally leg higher into December somewhat earlier, while the pullback into deeper November was also milder than initially feared. From a relative standpoint, Europe (particularly the FTSE-100, DAX and OMX) is catching up versus the US market and the SMI continues to stand out via its mega cap outperformance. One consequence of this is that in most of core Europe our anticipated rebound from the mid-October bottom into later December will end up higher as initially favored, whereas in the periphery the patterns remain corrective. The Euro Stoxx-50 can overshooting towards its summer high at around 3300 into later this week/early December, but on the back of the overshooting sentiment we expect Europe to head into an important tactical top in early December, which means we would not chase Europe on current overbought levels, and if so then only selectively.

• Inter Market Analysis: The US dollar remains strong but as long as we don’t get a new high momentum breakout in the DXY (and as long as the AUD does not break its early November low at 0.8540) our favored scenario remains to see more US dollar pulling back/consolidation into later December before resuming the underlying US dollar bull trend into Q1.

• Although commodities are still relatively weak, tracking the US dollar consolidation we see crude oil, copper, platinum and soft commodities at least stabilizing. In line with our last call, Russia is bouncing and together with the BBG Commodity index basing and the CCI Index having broken its June bear trend we expect more corrective bouncing in commodities and related sector themes into later December.

• After the exhaustive capitulation and after reaching our $1140 correction target we called an important tactical bottom in early November in gold and gold mines. With the aggressive rebound, the gold bugs index has broken its August bear trend and gold is on track with our initial target at $1250 to $1280 into deeper December, where we expect the yellow metal heading into a minor trading top followed by a tactical pullback into early January before moving higher into deeper H2 2015. We remain bullish gold and gold mines.

• Asian Corner: On the back of the Chinese rate cut decision, China continues to outperform and the SSEC has completed a major long-term price bottom, which is long-term bullish. In the rest of Asia and Emerging Markets the rebound from the mid-October low is corrective and in line with our recent calls we continue to see most of Asia and EM's posting a lower high versus its summer top into December, which is bearish medium-term and suggests more EM underperformance into H1 2015.

Weekly Comment


US Equity Market Update:

SPX in Overshooting Status!! After the 10% correction into our projected mid-October trading bottom we expected a market rally/rebound into late December before starting a major correction cycle into deeper H1 2015. Having said that, our favored pattern of a November/December rebound was actually to see a volatile corrective pattern developing instead of a sharp V-shape bottom followed by an impulsive squeeze. One reason for the vertical move and the SPX hitting new highs (whereas the MSCI World, most of Europe and Asia (ex Japan) is still trading below its summer top) was the continued outperformance of defensive mega caps together with the oversold bounce in cyclical sectors. In early November we adjusted our pullback scenario and we said that with a potential rotation into the lagging commodity sectors (on the back of our US dollar pullback call) it was likely that a pullback in the SPX into deeper/later November would only be shallow before moving higher into December.

On the sector front we see fading momentum in the recent outperformer sectors (technology, staples, DJT and DJU); whereas we got new breakouts and relative outperformance in retail stocks, selective strength in biotech and commodity themes are starting our anticipated next rebound leg. This rotation was the main reason why we actually did not see one real down day in the SPX, so that after a couple of days of a sideways consolidation the market broke out to a new all-time high.

The overall technical picture has not changed. The market breadth remains weak with the Russell-2000 losing momentum and a divergence in the number of new 52-week highs versus the new SPX high. We have an intact divergence in the VIX index versus the SPX. High yields remain weak, our indicator work has reached extreme territory and the vertical move from mid-October bottom is clearly exhaustive. Consequently, although it is currently too early to get bearish on the back of the still bullish seasonality, our view about the risk of a significant correction in Q1 has not changed and the continued rally without any real pullback suggests that we could even top out earlier than our previously expected late December timing.

Conclusion: On the back of the continued overshooting we expect our anticipated late December top to shift into early December, which we would see as the beginning of a distributive top building process (no top without a top formation!!) that could still last into January before starting our expected H1 major correction cycle. A break of 2070 would call for more overshooting towards 2095 and best case 2120/2140, whereas a break below 2040 would imply that a more important tactical top is forming.

Chart 1. ) S&P-500 Daily Chart

Chart 2. ) S&P-500 with McClellan Oscillator

Chart 3. ) S&P-500 Daily Chart

Weekly Comment



Rising SKEW Index!! In early July we said that after hitting an 8 year low in the VIX index around 10 this could represent the low of the year in the volatility. Into H2 we generally expected to see higher volatility and intellectually, by anticipating a bigger market top or any bigger correction in H2 2014 and/or Q1 2015 would implicitly suggest rising volatility before topping out.

Again, prior to important tactical tops and/or a major top we usually see a bigger divergence forming in the VIX versus the SPX. The VIX index bottomed in early July and tactically, we never had a longer lasting divergence between the VIX and the SPX since the 2007 top, which was led by an 8-month lasting period of rising volatility before the market finally topped out. With December we are heading into the 6th month of gradually rising volatility!!

In this context, it is also interesting to look at the SKEW index. The CBOE SKEW measures the tail risk in the market via the pricing of out-of-money options. A strongly rising SKEW index indicates that investors are obviously buying "crash protection". This gets interesting when we see a relatively low VIX index (the VIX Index measures the premium of the money/close to the money options) but the SKEW index rising. Relative to the October sell-off, the VIX is relatively low implying a lot of complacency in the market, which fits the 9-year low in the AAII Bearish Consensus and the strongly declining CBOE Put/Call Ratio (which is forming a major divergence). However, at the same time we have institutional investors buying crash protection.

Conclusion: A rising SKEW index is definitely not a pure timing tool but similar to divergences in other key indicators it tells us that minimum a bigger tactical top shouldn't be too far away.

Chart 4. ) S&P-500 versus VIX Index

Chart 5. ) S&P-500 with CBOE SKEW Index

Chart 6. ) S&P-500 with 10-Day CBOE Put/Call Ratio

Weekly Comment



Breadth Still Selective/Weak! The new high in the SPX was largely driven by the continued rally and outperformance in defensive mega cap sectors such as staples and healthcare as well as heavy weighted technology stocks. This is one reason why the breadth in the US market remains relatively weak.

It was a key call of our 2014 strategy to expect small and mid-caps to underperform and therefore mega caps to outperform. In this context we said that this year we expect to see the classic fireworks that we usually see in the late stages of a bull market. The vertical moves in staples, healthcare or transport we see as part of this overshooting process, and it is also the main reason why the SPX is again surprising on the upside. So although tactically we have recently been too cautious, in the bigger picture we still see the current market development pretty much on track with our base case scenario forecasting a significant correction in H1 2015.

The only question remains the potential timing of a major top. In our 2014 strategy we said that we favor a late summer top but that we couldn’t rule out an extended distributive top building phase into year-end, where the SPX could hit a new high via the described final overshooting in large and mega caps, and if so, this would not change our underlying scenario of expecting a significant correction in H1 2015. Tactical we always said that we expect the rally off from the mid-October bottom to move into a late December top. After the vertical and exhaustive rally of the last few weeks we question the market will continuing to rally into late December.

Generally, with the aggressive rally of the last few weeks our sentiment work has moved back into contrarian territory and is forming a major divergence versus the new SPX high, which is something we usually see prior to important tops. The bullish seasonal factor combined with central banking activity has caused the remaining bears to capitulate. Seasonally, we usually see a pullback in the first half December followed by the classic Christmas/year-end rally, and this is actually a very solid and high probability season pattern. We think this is a very consensual theme.

Conclusion: The SPX has been moving vertical and reinforced by central banking activity the squeeze continued last week. It suggests in our view that the majority of the investors are positioned, which means that the classic year-end rally we have more or less already behind us. If so, we automatically have the risk of moving into an earlier top either later this week or next week when the ECB finally makes their announcement.

Chart 7. ) S&P-500 Daily Chart with NYSE New 52-Week Highs

Chart 8. ) S&P-500 with AAII Bullish Consensus

Chart 9. ) S&P-500 with NAAIM Equity Position

Weekly Comment



Commodity Themes Bouncing! In our last weekly comment we said it is likely to see a second rebound wave in commodity sectors into later December, which tactically would be bullish SPX.

On the macro side commodity prices are at least stabilizing and although the price action in the economy sensitive commodities remains relatively weak and actually disappointing we see oil stocks starting our anticipated second rebound leg. A break of 1489 in the XOI would call for an extension towards 1531 to 1570. In the oil service sector a break of 247 would call for 260 to 270.

Generally, we are sticking to our underlying cautious trend picture, since the whole rebound pattern from the October bottom is just corrective and it will very likely lead to a lower high in the energy sector into December, which is strategically bearish and implies another correction wave into deeper/later Q1.

Steel stocks have broken their steep August bear trend, which completes an impulsive wave 5 correction cycle and suggests more near term strength towards 1180 to 1186 in the NYSE ARCE Steel index. However, similar to oil stocks, any bigger rebound into December will bring us a significant lower high versus the summer top and in this context the underlying price structure in this sector remains bearish.

Chart 10. ) US Oil Index (XOI) Daily Chart

Chart 11. ) Oil Service Index (OSX) Daily Chart

Chart 12. ) NYSE ARCA Steel Sector Daily Chart

Weekly Comment



Breakout in Retail!! The weak oil price is perceived as a threat on the macros side since it underpins the latent deflationary trend on the price front. However, the weak oil price is obviously also a big pushing factor for the global consumer sector where we see a broad based breakout in the US and European consumer stocks.

In mid-November we saw a concerted breakout of consumer discretionary and the SPX retail. Important to highlight is that both sectors have been underperformer versus the SPX with more or less trading volatile sideways for the last 12 months. All the more bullish is the breakout of the SPX retail out of a 12 months sideways trading pattern. Furthermore, form a relative standpoint the retail sector has completed a major inverted head & shoulder bottom, which suggests that we have just started a longer lasting outperformance trend in the US retail sector.

Conclusion: Short-term, consumer discretionary and the SPX retail are increasingly overbought and both sectors are reaching their next bigger targets/resistance levels. The question is also if it makes sense to call a major breakout in a sector if on the other hand we expect the overall market to move into an important top in the next few weeks. However, with completing a major relative bottom our call is that into 2015 we can expect to see more outperformance in US retail and this suggests that any pull back and/or correction moves in real terms would be a buying opportunity.

Chart 13. ) S&P Consumer Discretionary Daily Chart

Chart 14. ) S&P Retail Daily Chart

Chart 15. ) SPX Retail versus S&P-500

XRT (Retail) vs. S&P-500

N D J F M A M J J A S O N D J F M A M J J A S O N

x10 -2

4.20

4.30

4.40

4.50

4.60

4.70

4.80

4.90

5.00

Source: Thomson Reuters Datastream

S

H

S

bottom breakout !!

Weekly Comment


Inter Market Update:

More US Dollar Consolidation Into later December! Strategically, it was a key call of our 2014 strategy to expect the US Dollar moving into a major 4-year cycle bottom in deeper/later summer, which from a cyclical standpoint we saw and still see as the basis for a 2 years bull market into 2016. The break of the 1.35 key support in the EURUSD in July was the game changer for the EUR (completing a major double top and break of 2012 bull trend). In August we saw a series of major breakdowns in other key US Dollar pairs (SEK, GBP, SGD, CAD, EM currencies) and in September we got the break down in the AUDUSD. Together with the break of the highlighted key resistance in the DXY at 84.50 to 85 (2005 bear trend and the 2013 summer top), from a cyclical aspect, this gave us the ultimate and formal confirmation that a new major US Dollar bull market is underway, which we expect to last into 2016.

Tactically, after the impulsive July/September rally the DXY extended its bull cycle into early November, which together with a major divergence forming in our daily trend work we see as a wave 5, suggesting the US dollar should be near to an important tactical pull back, which however should not touch the underlying US dollar bull trend. After several days of sideways consolidation the DXY has hit a marginal new high, which questions the thesis of a short-term dollar pull back. However, the new high in the DXY is so far low in momentum, we have an intact divergence in our indicator work, and if we look into the relevant dollar pairs the EUR, AUD, NZD are still holding their early/mid-November low. As long as this is the case we expect in pairs such as the AUDUSD and NZDUSD at least to see a second corrective

rebound move (wave c) into December before starting the next bigger down leg. As long as the EURUSD does not break its early November low at 1.2350 we have at least short-term still the scenario of a potential double bottom forming. Generally, a break of 1.26 would be short-term aggressively bullish EUR and imply a short squeeze towards 1.27/1.28. In the DXY a break of 87.40 would be short-term bearish US Dollar an dimply a short and potentially sharp pull back towards 86.70 and 86 into later December.

Conclusion: The US Dollar remains strong and a real sell signal for indicating our suggested dollar pull back scenario into later December is still pending. However, as long as we don’t get a new high momentum breakout in the DXY, as long as the AUD does not break its early November low at 0.8540 and as long as the EUR is able to hold its early November low, our favored scenario remains to see more US dollar pulling back/consolidation into later December before resuming the underlying US dollar bull trend into Q1.

On the macro side it is obviously essential for our rebound call on commodities and related sector themes to see a somewhat weaker US Dollar and in this context we would keep a close eye on the AUDUSD pair. If a second rebound wave in the AUDUSD should fail, it would be an indication that also the rebound in commodities would finally fail, which sooner or later should also bring gold under pressure.

Chart 16. ) DXY Daily Chart

Chart 17. ) EURUSD Daily Chart

Weekly Comment



The rebound in the AUDUSD is weak and corrective but as long as the pair holds its early November low at 0.8540 we expect at least a second rebound wave c that could already complete a bigger corrective counter trend pattern, which we would see as the basis for renewed US Dollar strength into Q1.

A similar set up/patter we have in the NZD. The rebound from the early November low is so far just corrective and in this context we would expect just a second rebound wave into December before starting a new down leg into Q1.

One reason for DXY hitting a marginal new reaction high is the continued weakness of the JPY. However, with our daily trend work beginning to divergence, we see the USDJPY trading in a wave 5, which should be near to complete the impulsive October rally. A pull back in the JPYUSD should be the final trigger that also in the DXY we should see a somewhat stronger pull back.

Chart 18. ) AUDUSD Daily Chart

Chart 19. ) NZDUSD Daily Chart

Chart 20. ) JPYUSD Daily Chart

Weekly Comment



Commodities Bouncing But Momentum Remains Weak! On the back of our US Dollar pull back scenario we have been expecting a rebound in commodities into later December. Although commodities are still relatively weak we see crude oil, copper, platinum and soft commodities at least stabilizing. In line with our last call, Russia is bouncing and the move is significant. The RTS is on the way of challenging its July down trend and with the help of a more significant rebound in commodities this trend should be broken, which would call for 1112 as a next target. On the index side the BBG Commodity index is basing and the CCI Index has broken its June bear trend, which suggests more commodity strength near-term.

Conclusion: Although the rebound in commodities is so far just very weak we continue to believe into at least one more rebound wave into later December before into Q1 we could see renewed weakness. On the macro side the US Dollar remains a key variable for any momentum on the commodity side. Within the commodity complex we would keep a close eye on copper. Theoretically, copper is trading in a basing process but given that copper could not really profit from the rate cut in China is suspicious. Generally, a break of the early November low at 2.95 would be bearish copper and basically negate our whole commodity rebound scenario, so we would keep a close eye on copper as a key indicator in the commodity complex!!

Chart 23. ) Copper Daily Chart

Chart 24. ) RTS Daily Chart

Chart 21. ) CCI Index Daily Chart

Chart 22. ) BBG Commodity Index Daily Chart

Weekly Comment



Gold Bullish Into December! Tactically, we have been bearish gold from early August on and from a cyclical aspect we said we expect gold to move into a late Q4 bottom as the basis for a more significant and longer lasting rebound/bear market rally into deeper H1 2015. The break of the obvious key support at $1180 caused an exhaustive capitulation and after reaching our first correction target at $1140 we called an important tactical bottom in early November in gold and gold mines.

With the aggressive rebound of the last 2 weeks the gold bugs index has broken its August bear trend. In gold we have a fresh weekly momentum buy signal in place, which completes a major momentum divergence. Generally, together with the buying set up on the daily basis this suggests that the early November bottom represents a more important bottom, which we saw and continue to see minimum as the basis for a several months lasting rebound/bear market rally into deeper H1 2015.

Conclusion: Gold is on track with our initial target at $1250 to $1280 into deeper December, where we expect the yellow metal heading into a minor trading top followed by a tactical pullback into early January before moving higher into deeper H2 2015. From a pattern standpoint we expect gold and the gold bugs index posting a higher low into early January and in this context we remain bullish gold and gold mines and would see a pull back into early January as another significant buying opportunity. Our larger price target in deeper 2015 is unchanged at $1350 to $1400

Chart 25. ) Gold Daily Chart

Chart 26. ) XAUEUR Daily Chart

Chart 27. ) Gold Weekly Chart

Chart 28. ) Gold Bugs Index (HUI) Daily Chart

Weekly Comment


Asian Corner Update:

Major Breakout in China … But Tactically Overbought!! Driven by the rate cut decision of the Chinese central bank, the SSEC has hit a new reaction high and with the break of the 2450 handle the Shanghai Composite has taken out a technical key level, which completes a major 2 years price bottom as well as it breaks the 2009 bear trend. More importantly, relative to the MSCI World the CSI-300 is testing its 2009 underperformance trend, which sooner or later should be broken since relative to Europe we already have a major relative breakout of China in place. Generally, in our recent comments we said that after a tactical pull-back we would expect more gains into December but we actually did not expect an immediate break of the 2450/2550 key resistance into December. The rate cut decision was finally the trigger for this breakout and the question is how sustainable the rally is. Tactically, the Chinese market is increasingly overbought and with a divergence forming on the volume side we think that the market is on the way into an important tactical top into December. As a next target we have 2700 in the SSEC, which is the 50% retracement of the 2009/2013 bear cycle. Similar to our call on the US market and on Europe, we also expect in China and in Asia to see a significant correction starting very early in Q1. However, the difference is that a) the current breakout generates a long-term technical buy signal in China and b) China is about to break its underperformance trend from 2009, which is a completely different position.

Conclusion: Although we have been expecting higher prices into December, the momentum of the current rally and the break of the 2450/2520 key resistance represents a positive surprise. Tactically, the market is overbought and we expect

a pull-back starting later in December and into Q1/Q2 we also expect in the Chinese market to see a significant washout. However, on the back of the current bullish momentum, any bigger correction in the SSEC into H1 2015 (even if we were to see a negative surprise) will post a significant higher low versus its summer bottom and from a price structural standpoint this is bullish and would confirm a major trend shift, which at the end of the day suggests that a new major bull market in China has just started.

This picture stands still in stark contrast to the rest of Asia and the Emerging Market complex. The rebound from the mid-October low is just corrective and in line with our recent calls we continue to see most of Asia and EM's posting a lower high versus its summer top into December, which is bearish medium-term and suggests more EM underperformance into H1 2015.

Chart 29. ) CSI-300 Daily Chart

Chart 30. ) Shanghai Composite Weekly Chart Chart 31. ) CSI-300 versus MSCI World

Weekly Comment


Asian Corner Update:

The rebound in the Hang Seng is just corrective and with a new reaction high into December it is very likely to see a major divergence forming in the Hang Seng into December, which leaves the risk to post a lower high into December as a trigger for profit taking.

The rebound pattern in the MSCI Emerging market is purely corrective and the current rebound we see as wave C of a classic corrective A-B-C counter trend reaction. Next resistance and target region for our anticipated December top is the area of 1025 to 1035.

In August we already highlighted the corrective relative rebound pattern in the MSCI Emerging Market versus the MSCI World. In September the EM complex has broken its March outperformance trend and we said it is very likely to see minimum a re-test of the Q1 bottom if not even a new relative low. After an initial re-test of the March bottom we see the EM complex bouncing but given the underlying weak pattern structure and our expectation of a global risk off event in Q1, we expect to see more underperformance in the EM world into H1 2014.

Chart 32. ) Hang Seng Daily Chart

Chart 33. ) MSCI Emerging Market Daily Chart

Chart 34. ) MSCI Emerging Market versus MSCI World

MSCI EM $/MSCI World $

N D J F M A M J J A S O N D J F M A M J J A S O N

0.55

0.60

0.65

0.70

0.75

0.80

Source: Thomson Reuters Datastream

A

B

C

Weekly Comment


European Equity Market Update:

Europe Catching Up versus the US … Our cyclical road map for Europe was that after our anticipated early November minor top we expected a pull back into deeper/later November before starting tis next and final rebound into December. After a 2-week consolidation phase Europe has started its next rally leg somewhat earlier than favoured and the pullback into deeper November was also milder than initially feared, which is positive. Furthermore, from a relative standpoint, Europe (particularly the FTSE-100, DAX and OMX) is catching up versus the US market and the SMI continues to stand out via its mega cap outperformance. One consequence of this is that in most of core Europe our anticipated rebound from the mid-October bottom into later December will end up higher as favored, and in the one or other market can even see a marginal new breakout, whereas in the periphery the patterns remain corrective. The Euro Stoxx-50 can overshooting towards its summer high at around 3300 into later this week/early December, but on the back of the overshooting sentiment we expect Europe to head into an important tactical top in early December, which means we would not chase Europe on current overbought levels, and if so then only selectively. On the sector front the rally in cyclical sectors (which were our mid-October buy recommendation) are extending their rebound and in banks we see a classic catch up rally towards the upper end of its multi month trading range at around 205 to 210.

Euro Stoxx 50:

Instead of developing the expected deeper setback, the Euro-Stoxx managed to trade sideways in the first half of November and finally produced just a shallow pullback. With Friday's broad supported upside break-out of that trading range, the early November trading pattern finally turned out to be a classic sideways consolidation pattern. Because Friday's extension saw a leadership change favoring cyclicals, the likelihood is high to see more follow-through despite the increasingly overbought situation on the index front. On the momentum indicator side, a momentum divergence is not yet underway after Friday's high momentum rally so that a re-test of the last highs at 3289/3325 is potentially in the cards. However, due to the extreme overbought defensive camp, further short-term extension should see lower momentum and ongoing selectivity with the focus shifting to the lagging cyclical camp.

DAX-30 versus MSCI World:

The DAX has been one of the big underperformer versus the MSCI World in 2014. It is interesting to see that the whole underperformance pattern has been developing into a very classic wave 5 pattern and with last week's relative reversal the DAX has completed this wave 5 pattern.

Conclusion: Tactically, the DAX is trading in a corrective relative rebound pattern versus the MSCI world, which suggests that near-term we could still see the one or other surprise on the upside before into Q1/Q2 we should see the DAX again underperforming. However, after a completing a major wave 5 cycle it is unlikely to see a new low versus the MSCI World, which suggests that in later 2015 Germany and Europe as a whole should outperform the world and in particularly the US market.

Chart 35. ) Euro Stoxx 50 Daily Chart

Chart 36. ) DAX-30 versus MSCI World

Weekly Comment


European Equity Market Update:

FTSE-100:

From a relative point of view, our stance on the FTSE-100 was more constructive in anticipation of a countertrend rally in the commodity related themes.

Interrupted by a very short-lived pullback last week, the FTSE-100 extended its steep advance off from the mid-October low. Even if we see the expected further support from the commodity related sectors, the steep advance looks unsustainable and we have to go back to June/July 2013 to find a similar rally leg in terms of time and extension, which finally triggered a multi-week lasting consolidation phase. In terms of price, the major resistance is defined by the year highs at around 6880, which represents the technical cap for the current unsustainable steep advance. A new trading support is offered at 6641.

DAX-30:

The DAX managed to hold above 9148, which represented the potential trigger for another correction leg. Friday's high momentum rally negated the divergence on the indicator side, which negated on the one hand the toppish setup on that front. On the other hand, the current rally leg is now heading toward its last reaction high at 9891, and the year high at 10050 is coming within striking distance, which represents a major technical cap; on the back of an increasingly overbought situation on the daily chart basis, the index is not really in a position where major breakouts usually occur. In other words a re-test of the last highs is potentially in the cards but a sustainable breakout seems unlikely.

Swiss Market Index:

The SMI is one of the very few country indices, which produced a fresh year high in November, partly due to the healthcare and food mega caps plus the most recent bounce in cyclicals and financials.

The rally off from the mid-October low is the strongest 4-week advance since Q2 2013, which was followed by a significant correction. Furthermore, in the SMI we have a momentum divergence developing, and with regard to the recent shift favoring cyclicals, the SMI is expected to face headwind in relative and absolute terms by its overbought leaders in the healthcare and food segments. This should limit the impact of further short-term strength in the cyclical camp. In terms of price, the last high at 8875 defines the obvious key support.

Chart 37. ) FTSE-100 Daily Chart

Chart 38. ) DAX-30 Daily Chart

Chart 39. ) Swiss Market Index Daily Chart

Weekly Comment


STOXX Europe 600 Index Sector Overview:

Weekly Comment


Weekly Technical Indicators: (Source: Pinnacle Data, Datastream) Charts: Metastock

Weekly Comment


Global Sales and Trading Disclaimer (FICC and Equities)

Issued by UBS AG and/or affiliates to institutional investors; it is not for private persons. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This material has been prepared by sales or trading personnel and it is not a product of the UBS Research Department. It is for distribution only under such circumstances as may be permitted by applicable law. This material is proprietary commentary produced in conjunction with the UBS trading desks that trade as principal in instruments mentioned within. This commentary is therefore not independent from the proprietary interests of UBS or connected parties which may conflict with your interests. UBS may have accumulated a long or short position in the subject security, or derivative securities thereof, on the basis of this material prior to its dissemination. This material constitutes an invitation to consider entering into a derivatives transaction under U.S. CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument. UBS may trade as principal or otherwise act or have acted as market-maker in the securities or other financial instruments discussed in this material. Securities referred to may be highly illiquid which may adversely impact the price and speed of execution of orders in those securities. Furthermore, UBS may have or have had a relationship with or may provide or has provided investment banking, capital markets and/or other financial services to the relevant companies. Neither UBS nor any of its affiliates, nor any of UBS’ or any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material. UBS has policies designed to manage conflicts of interest. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, groups or affiliates of UBS. Additional information may be made available upon request. Opinions expressed may differ from the opinions expressed by other divisions of UBS, including those of the Research Department. For access to UBS Research, including important disclosures, go to the ResearchWeb at www.ubs.com. This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. UBS does not undertake any obligation to update this material. This material is prepared from information believed to be reliable, but UBS makes no representations as to its accuracy or completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the materials. It should not be regarded by recipients as a substitute for the exercise of their own judgment. Any prices or quotations contained herein are indicative only and not for valuation purposes. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. This material is not an official confirmation of terms. Prior to entering into a transaction you should consult with your own legal, regulatory, tax, financial and accounting advisers to the extent you deem necessary to make your own investment, hedging and trading decisions. Communications may be monitored.

Statement of Risk

Options, structured derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky and may be appropriate only for sophisticated investors. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. Various theoretical explanations of the risks associated with these instruments have been published. Prior to buying or selling an option, and for the complete risks relating to options, U.S. investors must receive a copy of 'The Characteristics and Risks of Standardized Options.' You may read the document at http://www.theocc.com/publications/risks/riskchap1.jsp or ask your salesperson for a copy. United Kingdom and rest of Europe: Except as otherwise specified herein, this material is communicated by UBS Limited, a subsidiary of UBS AG, to persons who are eligible counterparties or professional clients (as detailed in the FSA Rules) and is only available to such persons. The information contained herein does not apply to, and should not be relied upon by retail clients. UBS Limited is regulated by the FSA. Turkey: Prepared by UBS Menkul Degerler AS on behalf of and distributed by UBS Limited. Russia: Prepared and distributed by UBS Securities CJSC. South Africa: UBS South Africa (Pty) Limited (Registration No. 1995/011140/07) is a member of the JSE Limited, the South African Futures Exchange and the Bond Exchange of South Africa. UBS South Africa (Pty) Limited is an authorised Financial Services Provider. Details of its postal and physical address and a list of its directors are available on request or may be accessed at http:www.ubs.co.za. Switzerland: This material is distributed in Switzerland by UBS AG to institutional investors only. United States: In the U.S., securities underwriting, trading and brokerage activities and M&A advisory activities are conducted by UBS Securities LLC, a wholly owned subsidiary of UBS AG that is a registered broker-dealer and a member of the New York Stock Exchange and other principal exchanges and SIPC. Canada: This material is distributed by UBS Securities Canada Inc., a subsidiary of UBS AG and a member of the principal Canadian stock exchanges & CIPF. Japan: This material is distributed in Japan by UBS Securities Co., Ltd, a registered securities company, or by UBS AG, Tokyo Branch, a licensed bank. For further details of our local services, please call your regular contact at UBS in Japan. Hong Kong: This material is distributed in Hong Kong by UBS Securities Asia Limited or by UBS AG, Hong Kong Branch. Singapore: This material is distributed in Singapore by UBS Securities Pte. Ltd or UBS AG, Singapore Branch. Asian jurisdictions (excluding HK, Singapore & Japan): This material is not to be construed as a solicitation or an offer to buy or sell any securities, related financial instruments or services. Please also note that the products have not be intended for marketing to the public. Australia: These materials are distributed in Australia by UBS AG (Holder of Australian Financial Services Licence No. 231087) and UBS Securities Australia Ltd (Holder of Australian Financial services Licence No. 231098) to persons who satisfy the definition of wholesale client for the purposes of the Corporations Act 2001 (Cth) and not intended for distribution to any retail clients. UBS AG, Australia Branch is an authorised foreign Authorised Deposit-taking Institution under the Banking Act 1959 (Cth), and is supervised by the Australian Prudential Regulation Authority. However, it is important for you to note that any products or transactions described herein are not deposit products and will not be covered by the depositor protection provisions set out in Division 2 of the Banking Act 1959 (Cth), as these provisions do not apply to foreign Authorised Deposit-Taking Institutions. New Zealand: This material is distributed in New Zealand by UBS New Zealand Ltd. An investment adviser and investment broker disclosure statement is available on request and free of charge by writing to PO Box 45, Auckland, NZ. Israel: UBS AG and its affiliates incorporated outside Israel are not licensed under the Investment Advice Law and are therefore operating under the Sophisticated Investor exemption. Whilst UBS AG holds insurance for its activities, it does not hold the same insurance that would be required for an investment advisor or investment marketer under the relevant Investment Advice Law Regulations. Dubai: UBS AG Dubai Branch is regulated by the DFSA. This material is intended for Professional Clients only. Any securities mentioned herein that have not been registered under the Securities Act of 1933 may not be offered or sold in the United States except pursuant to an exception from the registration requirements of the Securities Act and applicable state securities laws and in such circumstances as may be permitted by applicable law. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. © UBS 2014. All rights reserved.

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