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Equities Sales Trading Commentary Technical Analysis Weekly Comment Global Michael Riesner Marc Mller 03/02/2015 [email protected] [email protected] +41-44-239 1676 +41-44-239 1789

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Make Or Break in the US EM Rolling Over! US Trading: From a pure price point of view the setup in the US has not changed, given that all major headline

indices and key sectors continue to trade in their multi-week sideways trading ranges. However, from a cyclical aspect the SPX has set our suggested trading top last week, on the indicator side we have a fresh momentum short signal in place, cyclical key sectors (DJT, SOX, BKX) are near to their obvious key support levels, and on top of this we got a bigger reversal in the outperforming and overbought defensive sectors (Staples, DRG, DJU), which is increasing the pressure on the SPX. Together with the VIX index forming a triangle pattern, we see the SPX heading into a classic make or break setup. On the sector front energy stocks continue to bounce but the upside we see limited. On technology we remain bearish and we still see minimum a test of the October low at 4150 in the Nasdaq into first half April.

In line with last week's call we continue to believe in a test of the pivotal mid-December low at 1972 later this week/next week. On the back of the contracting volatility and a triangle forming in the VIX index we see a break of 1972 as a trigger a short but sharp sell-off, where 1926 and 1820 remain our initial targets on the downside into later February; whereas a break of 2064 would take a lot of the immediate downside risk.

US Strategy: After seeing a 10% correction from our anticipated later summer top we called a tactical bottom in mid-October, which we saw as the basis for a significant rebound/rally into later December before starting a sharp correction leg into later Q1/early Q2. On the macro side, we have an intact deflationary trend (via an overshooting US dollar), and together with intact major divergences on the indicator side (VIX, high yields, weak breadth) we see the SPX trading in a wave 5 of a larger degree, where a break of the mid-December low at 1972 would give us the ultimate confirmation that the 2011 bull cycle is complete. We are sticking to our cyclical roadmap and continue to see the risk of a 15% to 20% correction into late Q1/early Q2 before resuming the underlying secular bull market into H1 2016.

European Trading: The picture in Europe is getting more diverse. Last week the CAC-40 completed a multi-year relative bottom versus the MSCI World, which is bullish but stands in contrast to the IBEX, which is already losing momentum via the weakness in the banking sector. Tactically, after being aggressively overbought, most of Europe is in a constructive consolidation but in the context of any missing divergence in our momentum we can still get another but limited move on the upside. However, with the risk of the SPX breaking its key support, for Europe the air on the upside is also getting increasingly thin, where negating the last breakout in the Euro Stoxx at 3320 and a break of 10550 in the DAX-30 would be short-term negative and imply a more significant pull back into later February.

The underlying relative picture in Europe has not changed. Although tactically we expect Europe to correct into late Q1, with an intact relative long signal versus the US any correction into later Q1/early Q2 should be milder than in the US, and in the larger picture we would see this as a buying opportunity for an aggressive rally into summer. Short-term, we are nonetheless sticking to last week's call and would not chase Europe on the upside.

Inter Market Analysis: Last week we saw weakness coming back into EM currencies and with a bigger reversal the MSCI Emerging Market is near to complete its corrective December rebound. The BOVESPA continuous to sit on the edge, where a break of 45000 would be rather bearish and weigh on the EM sentiment. We continue to see the risk of a final but sharp correction in the EM complex into later Q1/early Q2, which nonetheless should be a superb buying opportunity in the big picture.

As long as trading below its January 22nd top at $1306, gold remains in consolidation mode, which can extend into next week. However, we are sticking to our underlying bullish view on gold and gold mines and see any weakness as a buying opportunity for moving higher into later March and into April, where we expect gold to reach minimum $1360 to $1380.

Weekly Comment


US Equity Market Update:

Make Or Break in SPX! From a pure price point of view the setup in the US has obviously not changed since the SPX and all major sectors are still trading above their pivotal mid-December low, where in the SPX 1972 remains a key support. Objectively seen, the market remains in neutral stance while trading between 1972 and 2093, which is the December 29th reaction high. However, from a cyclical aspect we got our suggested trading top last week and also on the sector front the picture is beginning to change, which actually puts a negative bias on the market and in this context we continue to think that very soon we should see the ultimate test of the 1972 key support. From a cyclical aspect a break of this level would trigger a clear defined short signal, and it would imply seeing more weakness into initially later February.

Following our cyclical model we have been looking at an important trading top last week as the basis for a down test into mid-February. With a fresh momentum short signal in place, our trading top is confirmed, which means the market is per definition short biased, whereas only breaking the January 22nd high at 2064 would negate the immediate downside risk and should be used as a stop loss trigger for tactical short positions.

On the sector front, cyclical key sectors such as transport, banks, and semiconductors are near to their key support levels and these sectors are underperformers. In early January we highlighted the new relative breakout in defensives. Utilities and staples could also hit new reaction highs in absolute terms. However, these sectors are overbought and last week we got a bigger reversal in utilities, staples, and healthcare. This is very important, since the US market is moving into a setup where with the next down leg cyclical key sectors would break their key support levels and together with defensives pulling back we would have no active rotation in the market, which means the SPX would automatically come under pressure. If so, the break of 1972 would be very likely.

Conclusion: In line with last week's call we continue to believe in a test of the pivotal mid-December low at 1972 later this week/at the latest next week. On the back of the current sector setup, the overall contracting volatility and with a triangle forming in the VIX index, it is increasingly likely that a break of 1972 (which is also the 200-day moving average) would trigger a short but sharp sell-off, where 1926 and 1820 remain our initial targets on the downside into later February, whereas only a break of 2064 would negate the immediate downside in the market.

Chart 1. ) S&P-500 Daily Chart

Chart 2. ) S&P-500 with VIX Index

Chart 3. ) Nasdaq-Composite Weekly Chart

Weekly Comment



Sentiment: The sentiment in the market remains elevated. In the NAAIM Exposure Index the US money managers are still positioned pretty much on the long side, which is extreme in the historical context. This is important since via the sideways trading action of the last few weeks we do not see any real deterioration in the sentiment, which suggests that there is an ongoing high complacency in the market.

With the SPX trading not far from its obvious key support, the too bullish sentiment is a threat to the market and suggests that a break of the mid-December low could lead to a very erratic adjustment in sentiment and this automatically implies the risk of a short but sharp market reaction, which fits the triangle pattern in the VIX index where a break of 23 would be bullish VIX and suggest a big move higher, which would be bearish SPX.

Market Breadth: It was a key call of our 2014 strategy to expect small and mid-caps to start underperforming, whereas the performance in the US market should clearly go into large caps. Whereas the Russell-2000 has been more or less trading sideways over the last 12 months, we have seen technology, staples, utilities and particularly healthcare trading in bull trends and outperforming.

Tactically, the Russell-2000 has been rebounding relative to the SPX since its mid-October bottom where we recommended buying the oversold mid-cap segment. However, if we look at the Advance/Decline line of the Russell-2000 we can see how weak the internal breadth in the broader market really is. While the Russell has been largely trading sideways we have a clear defined down trend in this breadth indicator. So in the Russell it seems that the larger stocks are holding the market on the current high levels, whereas the majority in the Russell seems to be in correction mode, which fits the deteriorating number of SPX stocks trading above their 200-day moving average since summer 2014.

Conclusion: We see the sideways trading action in the Russell-2000 since early December as a classic distribution, where the support area of 1050 to 1035 represents the key support of a classic head & shoulder top formation.

Chart 4. ) S&P-500 with NAAIM Exposure Index

Chart 5. ) Russell-2000 Daily Chart

Chart 6. ) Russell-2000 with Russell Advance/Decline Line

Weekly Comment



Reversal in Defensive Outperformer Weighs!! On the sector front the overall picture in the cyclical key sectors such as transport, banks and semiconductors is unchanged. Whereas energy stocks may bounce short-term (but we think this move will be limited in price and time) we have with last week's weakness DJT, SOX and the BKX trading very near to their key support levels. More importantly, with sideways trading over the last few weeks the volatility has been contraction, and as a result the ADX indicator (as trend measuring tool) is at a very low level in the SOX, which is contrarian and suggests that a trend move/classic breakout situation in this key sector should not be too far away. Transport is underperforming, banks are underperforming on the back of the flattening yield curve, and with the current cyclical background we also think it is increasingly the SOX index that will finally break its relevant key support level!!

On the other hand, we have the defensive camp where in early January we highlighted the new relative breakout. Utilities and staples could also hit in absolute terms new reaction highs, and this rotation is so far clearly one of the stabilizing factors of the market. The problem is that utilities, staples, and healthcare are overbought and last week we got a bigger reversal in these sectors. Staples have broken the trend support of a rising wedge, and in the DRG we have a potential double top forming, which is potentially negative in absolute terms.

Conclusion: The US market is moving into a critical phase where cyclical sectors are sitting on key support and continue to underperform, whereas defensives are overbought and starting to pull back. Without any new real active rotation the SPX will be automatically vulnerable for a negative surprise so that a break of 1972 and a subsequent bigger correction move is getting increasingly likely.

Chart 7. ) Dow Jones Transport Daily Chart

Chart 8. ) US Banking Index (BKX) Daily Chart

Chart 9. ) US Semiconductor (SOX) Daily Chart

Chart 10. ) S&P-500 Consumer Staples Daily Chart

Weekly Comment



Relative to the S&P-500, we got a clear breakout of the utilities sector and from a pattern standpoint as well as believing into a risk off phase into later Q1/early Q2 the breakout suggests more outperformance.

However, in real terms utilities are overbought and last week Friday the DJU posted a bigger reversal after having reached our target projection at 660. With our daily trend work rolling over on overbought extremes it is likely to see more near-term weakness, which would weigh on the overall market.

On Friday we saw a bigger reversal in healthcare and with our daily trend work rolling over and diverging we see the sector as short-term toppish. This is important since with more weakness, the DRG would very quickly move into a classic double top speculation with key support at 524.

Again, although we continue to expect healthcare, staples and utilities to outperform, more near-term weakness in absolute terms in combination with a breakdown in cyclical sectors suggests the risk of a negative surprise in the SPX; and only a very big and aggressive bounce in the energy sector would avoid this negative surprise!!

Chart 11. ) Dow Jones Utilities versus S&P-500

XLU vs. S&P-500

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

x10 -2

2.00

2.10

2.20

2.30

2.40

2.50

2.60

2.70

Source: Thomson Reuters Datastream

Chart 12. ) Dow Jones Utilities Daily Chart

Chart 13. ) US Healthcare (DRG) Daily Chart

Weekly Comment


Inter Market Update:

Emerging Markets Completing December Rebound! After the break down into mid-December Emerging Markets were extremely oversold. On a daily basis, markets such as the MXSE in Mexico were record high oversold, where we said a bigger and longer lasting rebound into January would be very likely, which in the bigger picture should nonetheless produce just another lower reaction high within a new bear cycle that has started from its September top. The structure in the Emerging Market complex is diverse. Whereas EM Asia has been clearly outperforming on the back of a continued rally in the NIFTY and China outperforming, we have still a very weak picture and weak patterns in Latin America and EM Eastern Europe. In our last week's report we have highlighted the corrective rebound structure in EM currencies (BRL, MXN, KRW) and we said it is just a matter of time to see a new down leg in these currencies starting. Last week we got a bigger reversal in the MSCI Emerging Market Currencies index. The BRL, MXN and also the KRW are sitting on key support, and on the equity side the MSCI Emerging Market is also sitting on its short-term trend support, which is a key level!!

Conclusion: The rebound in the Emerging Market complex and particularly in the underperformer markets was purely corrective, whereas the outperformers in Asia (India and China) are overbought and near-term toppish. Last week's reversal in the MSCI World is the beginning of a short-term top building process, which should complete a classic corrective a-b-c rebound pattern, and we continue to see the EM complex starting another tactical down leg from a deeper February top into March/April. Translated into markets, we see Mexico and Brazil at risk for another big down leg. The

KOSPI is near to complete wave C of a corrective counter trend pattern, whereas the outperforming India, Turkey and the MSCI China are overbought and due for a pull-back within an intact long-term bull trend. In our December 16th weekly report we highlighted the BOVESPA sitting on the edge. With last week's sell-off, this market in again testing its very obvious long-term key support and a break of 45000 would be rather bearish and weigh on the EM sentiment, which on the macro side would again just underpin the deflationary picture.

Generally, regardless of any short-term top building process, and the risk of another correction leg in the EM complex into later Q1/early Q2, in the bigger picture we would nonetheless see this correction leg as a superb buying opportunity for a big rally in the Emerging Markets and particularly markets such as the BOVESPA we see in 2015 moving into a long-term buying opportunity.

Chart 14. ) MSCI Emerging Market Daily Chart

Chart 15. ) MSCI Emerging Market Currency Index

Chart 16. ) USDKRW Daily Chart

Weekly Comment



In the KOSPI, the whole rebound structure since the October low has in our view a corrective style and in this context we see the KOSPI near to complete wave C in mid-February as the basis for starting another correction leg into the March/April time window.

We would use strength to sell/take profit.

As weak as the rebound in the USDMXN was, as weak and purely corrective was the rebound in the MXSE, where it is in our view just a matter of time to see a new bearish trend continuation break down, which would call for a move towards 2100 to 2000.

The outperformer in the Emerging Market complex, are the NIFTY, Turkey and China and all these markets have all hit new reaction highs into January and also the underlying trends in these markets are outright bullish. However, tactically these markets are overbought and due for a pull back, where a break of 67 would trigger a tactical short signal in the MSCI China.

Chart 17. ) KOSPI Daily Chart

Chart 18. ) MXSE (Mexico) Daily Chart

Chart 19. ) MSCI China Daily Chart

Weekly Comment



BOVESPA Sitting On The Edge! In our December 16th weekly report we have highlighted the BOVESPA sitting more or less on its very obvious multi-year key support at around 45000. In December we said that a rebound into January would be very likely but with the next bigger risk off leg into later Q1 we would very likely see a break of this key level. From a pure technical standpoint these kinds of obvious levels are acting like a cliff and copper as well as crude oil were just two prominent examples last year of what kind of trend move a break of such an obvious support level can trigger.

Tactically, the whole rebound of the BOVESPA since the mid-December low was just corrective and the market has been underperforming. With a fresh buy signal in the USDBRL (which is near to generate a bullish trend continuation breakout) we have another trigger for the BOVESPA to start another down leg and if so, this sell off is very likely to weigh on the Emerging Market complex.

Conclusion: Over the next 5 to 10 trading sessions we expect the BOVESPA to start a serious test of the key support at 45000 and given that this level represents also a long-term trend support, a break would likely to be the trigger of another sharp correction leg into later Q1/early Q2. However, if we look at the underperformance cycle of the BOVESPA versus the MSCI World we see Brazil trading in a wave 5 of a larger degree, which suggests that a potential capitulation into Q2 could finally result in a multi-year buying opportunity!!

Short-term we remain cautious on Brazil but on track with our 2015 strategy we basically think that this market moves into a major long-term bottom in 2015!!

Chart 20. ) BOVESPA Daily Chart

Chart 21. ) BOVESPA Weekly Chart

Chart 22. ) USDBRL Daily Chart Chart 23. ) BOVESPA versus MSCI World

Weekly Comment



Gold In Consolidation Mode Buy The Dips! Tactically we called a major bottom in gold and gold mines in early November and it was a key call of our 2015 strategy to see the November rally extending into Q2, which in the bigger picture and in US Dollar terms we would nonetheless see only as another bear market rally as part of a larger bottom building process into 2016, whereas in EURO terms the technical picture for gold looks much more bullish. On the back of the impulsive bull run of the last few weeks we think that the Q1 2014 low already represents a long-term bottom as the base for the next long-term and multi-year bull market, which in US Dollar terms we expect to start not before H2 2016!

Conclusion: After the impulsive early January breakout above its key resistance at $1250 gold was overbought and on track with our short-term cycles we see a corrective pull back. As long as trading below its January 22nd top at $1306, gold remains in consolidation mode, which can extend into next week. However, we are sticking to our underlying bullish view on gold and gold mines and see any weakness as a buying opportunity for moving higher into later March and into April, where we expect gold to reach minimum $1360 to $1380.

After the impulsive breakout and completing a classic double bottom, the gold bugs index is in consolidation mode as well as and from a pattern standpoint the sideways trading action is very constructive. With an intact weekly buy signal after completing a huge bullish divergence we would still use any weakness in gold mines to buy and out target projection into March/April remains at minimum 226 to 240, with potential to overshoot towards 265!!

Chart 24. ) Gold Daily Chart

Chart 25. ) XAUEUR Daily Chart

Chart 26. ) Gold Bugs Index (HUI) Daily Chart

Chart 27. ) Gold Bugs Index (HUI) Weekly Chart

Weekly Comment


European Equity Market Update:

CAC-40 Breakout ... DAX Remains Strong!! Short-term, the picture in Europe is getting more diverse. Last week the CAC-40 completed a multi-year relative bottom versus the MSCI World, which is bullish but stands in contrast to the IBEX, which is already losing momentum via the weakness in the banking sector. Tactically, most of Europe has been pulling back but so far the consolidation has a constructive character, where another but limited move higher is still possible. However, with the risk of the SPX breaking its key support, in Europe the air on the upside is also getting increasingly thin. Last week we said that as long as we do not see a classic momentum divergence it is too early to get cautious on Europe. With a new high in the Euro Stoxx this week we would get this potential divergence, which is tactically toppish.

Conclusion: After reaching our January overshooting targets Europe is overbought and with forming a classic momentum divergence it is likely to move into an initial tactical top this week, so we would not chase Europe too aggressively on current price levels. On the upside our Euro Stoxx target is unchanged at 3460, whereas negating the last breakout at 3320 and a break of 10550 in the DAX-30 would be short-term negative and imply a somewhat deeper pull back into later February. The underlying relative picture in Europe has not changed. Although tactically we also expect Europe to correct into later Q1, with an intact relative long signal versus the US market, any potential correction into later Q1/early Q2 should be milder than in the US. In the larger picture we would see this as a big buying opportunity for an aggressive rally into summer. Short-term, nonetheless, we are sticking to our last week's call and would not chase Europe on the upside.

Euro Stoxx 50:

Last week's pullback remains constructive and has the character of a consolidation, where the June 2014 high at 3320 defines a key support. On the back of the still missing classic daily momentum divergence we continue to see another but final extension on the upside towards 3460, which we would see as part of a short-term top out pattern. A daily close below 3325 would suggest that a tactical top is already in place. In that case, the next minor support would be at 3278, whereas the next bigger price support is at around 3200 for a pullback campaign.

CAC-40 versus MSCI World:

In our January 20th report we highlighted the big relative breakout of Germany and the Swiss Market in Euro terms as an initial game changer for Europe! The QE announcement of the ECB triggered a broad based breakout across Europe and in relative terms we saw a big reversal in the FTSE-MIB and the PSI-20. In last week's call we highlighted the multi-year relative bottom of the CAC-40 versus the MSCI World, and with the continued strength of the French market last week we got a clean breakout of the CAC-40 versus the MSCI World; and versus core Europe the French market setup has been improving.

Generally, regardless of any tactical correction scenario into later Q1 and/or into Q2, the break of a multi-year relative bottom is bullish and implies a surprise in the CAC-40 into H2 2015, and in this context we would use any weakness into later Q1 and into Q2 to buy/add.

Chart 28.) Euro Stoxx-50 Daily Chart

Chart 29.) CAC-40 versus MSCI World

CAC40/MSCI W orld

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

9

10

11

12

13

14

15

16

breakout!

Weekly Comment


European Equity Market Update:

FTSE-100:

In the past, the main reason for the underperformance of the FTSE was its significant exposure to energy and material stocks, which together with banks were the weakest sectors on a year-to-date basis. However, we expect these sectors to bottom out into later Q1, so that new highs and a major breakout in the FTSE over the course of the next 12 months is actually just a matter of time.

Tactically, the situation is overbought after the recent vertical rally, so that last week's reversal below the key resistance at 6900 was not a big surprise. With our daily trend work starting to roll over in overbought territory, we see last week's pullback as part of a tactical top building process, and we continue to expect more pulling back into later February with the first classic retracement level of the last rally leg at 6586.

DAX-30:

The DAX remains among the outperformers in Europe!! After being aggressively overbought, last week's consolidation was not a big surprise, and as long as the DAX does not break last week's reaction low at 10552 the short-term picture remains bullish with the chance to see another overshooting towards 11000 to 11200, which however will produce a momentum divergence that we would see as short-term toppish.

Conclusion: As long as the DAX trades above 10552 the market remains bullish biased, but given the fact that a new high would very likely form a momentum divergence we would actually use more strength to take profits instead of chasing the market too aggressively on the upside.

Swiss Market Index:

The picture in the SMI remains unchanged. The SMI is suffering from the strong CHF but a bounce is underway on both fronts. In terms of price, the index has almost retraced 50% of its mid-January decline and together with the 200 day moving average at 8653 we have a technical resistance area coming in sight. With the last significant reaction high at 9292 not within striking distance, we expect the SMI to remain capped and after the most recent bounce, we favor the tactical focus to shift back to supports soon. In that context the obvious key support zone is defined by the mid-October low at 7870.

Chart 30.) FTSE-100 Daily Chart

Chart 31.) DAX-30 Daily Chart

Chart 32.) 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


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